US expansions and differing strategies create performance gaps
Canada’s big banks are starting to show signs of diverging performance – and analysts expect this trend to continue in the coming year, particularly due to their varying strategies in the US market, according to a recent analysis by Fitch Ratings.
The Big Six lenders, who have each taken different approaches to expanding in the US, are now facing scrutiny over whether their strategies will yield the expected returns.
“The US is a costly market, both in terms of dollars and in terms of management time,” said Maria-Gabriella Khoury, Fitch’s senior director of North American banks, during a webinar on Thursday. “We have to wait to see whether these strategies will pan out the way management wants them to pan out.”
Historically, Canada’s major banks have been viewed as safe, conservative investments with little differentiation among them, said Fitch analyst Peter Simon. However, recent performance and valuation differences across the Big Six have been much more pronounced, leaving analysts and investors paying closer attention to each bank’s individual strategy.
The performance gap among Canada’s major banks widened during the most recent quarter.
Bank of Montreal (BMO) missed analysts’ expectations, while Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), and National Bank of Canada (NBC) surpassed them. Scotiabank’s performance was in line with expectations, but Toronto-Dominion Bank (TD) posted an unexpected loss, largely due to its ongoing issues with anti-money laundering compliance in the US.
These divergent outcomes are largely tied to the banks’ international operations, especially in the US, where each lender has followed a different path. RBC has focused on high-net-worth private banking, while TD has expanded its retail banking presence through an extensive branch network.
BMO, which recently integrated its acquisition of Bank of the West, is now facing higher impairments, and CIBC is applying its Canadian strategy on a smaller scale in the US Scotiabank, meanwhile, is streamlining its operations in Latin America.
Read more: Canadian banks struggle with loss provisions and regulatory pressures in Q3
"Right now, all the banks are in that phase of ‘Let’s work on it and see if it will pan out,’” Khoury said, adding that the banks are generally disciplined about exiting markets that don’t meet profitability targets. She expects another year of divergence in performance but doesn’t foresee anything too extreme.
Simon pointed out that loan growth and capital market activity in the US are likely to remain subdued until after the US elections in November. He also noted that banks’ provisions for potential bad loans are expected to peak in 2025.
Fitch’s outlook for five of the six major Canadian banks remained stable, but TD Bank is under a negative outlook due to its ongoing US investigation into money laundering and other financial crimes.
TD recently set aside $2.6 billion to cover anticipated fines from the probe, adding to the $450 million it put aside earlier this year. Khoury said the bank could face non-monetary penalties, including restrictions on branch expansion and loss of franchises, though the exact consequences remain uncertain.
While TD is expected to avoid mergers and acquisitions in the near future, Simon doesn’t see the bank retreating from the US altogether.
"It’s hard to assess what these non-monetary penalties are, given the investigation is still going on,” Khoury added.
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