Canadian banks experienced their worst year of profit expansion in a decade, and expect subdued growth to continue
Toronto Dominion Bank (TD Bank), Canada’s largest bank by assets, and Canadian Imperial Bank of Commerce (CIBC) posted smaller-than-expected quarterly profits on Thursday, sending shares sliding. CIBC shares fell 4.8% and TD shares dropped 2.8% and both were on track for their worst close in almost two months. The Toronto stock benchmark fell 0.4%.
Similar fates have befallen all but one of Canada’s six biggest banks in a reporting season that closed out the worst year of profit expansion in more than a decade.
Since Bank of Nova Scotia kicked off fourth-quarter reporting on Nov. 26, the Canadian banks index has lost 3.5%, compared with the benchmark’s 1.1% decline.
Canadian banks are expecting another year of subdued earnings growth in fiscal 2020.
“Certainly, the days of robust growth for banks are over,” Barry Schwartz, chief investment officer at Baskin Asset Management, told Reuters. Schwartz forecasts 3% to 5% earnings growth in fiscal year 2020. “Banks aren’t going to grow more than the economy over the long term. A lot of the growth we saw over prior years was really a recovery from such terrible environments coming out of the financial crisis.”
Canadian banks are facing rising loan loss provisions and limited appetite for dealmaking as economic uncertainties mount. Oil price declines and decade-high consumer insolvencies in Canada are also creating headwinds.
Earlier in 2019, stronger growth in Canadian banks’ U.S. businesses helped offset slower growth at home. CIBC’s takeover of PrivateBancorp two years ago was the cornerstone of Chief Executive Officer Victor Dodig’s push to diversify beyond Canada. Profit from U.S. commercial banking and wealth management is at a record $180 million for the bank, and even though earnings missed analysts’ estimates, growth continues to outpace CIBC’s banking businesses in Canada. There was a 37% increase from U.S. commercial banking and wealth management in the quarter, surpassing its goal of getting 17% of its earnings from U.S. businesses by 2020.
But a slowdown U.S. expansion as of late, as well as challenges to other segments like capital markets as deals activity has stalled that growth, said Bryden Teich, portfolio manager at Avenue Investment Management. He added that that will continue to weigh on banks into 2020.
“Banks are in a slow-growth environment but are having to continue making these investments” in order to remain relevant and grow market share,” Teich told Reuters.
Dodig told investors earlier this year that 2019 earnings would be “relatively flat” after posting quarterly results hampered by a contraction in domestic mortgages and net interest income. CIBC’s per-share earnings fell 7.9% in the fourth quarter, leaving earnings down 3.9% for the year.
CIBC’s domestic mortgage book was unchanged from a year earlier at $202 billion in balances.
Banks are also facing higher expenses, as they invest in new technologies and take restructuring charges to boost efficiencies. The most notable was Bank of Montreal (BMO), which took a $357 million restructuring charge to cut about 5% of its workforce.
This being said, Teich expects banks with bigger U.S. operations to face fewer challenges than their domestically focused counterparts. With pressure on net interest margins in the United States easing as the Federal Reserve pauses rate cuts following three reductions this year, Canada faces the prospect of lower rates if global trade uncertainties persis.
Even if a trade deal is struck between the U.S. and China, those uncertainties are indeed likely to continue, said Bank of Canada Deputy Governor Timothy Lane.
“The damaging effects of trade conflict are only partly offset by easier monetary policy,” Lane said at a speech at the Ottawa Board of Trade, adding that it remained unclear whether market pricing fully reflected the inherent risks from the trade tensions.
Markets have taken a very optimistic approach for some time, Lane said, citing near-record equity markets and very low credit spreads.
“The sense is there’s a bit of disconnect between this quite optimistic pricing in the markets and the fact a lot of the macroeconomic news still suggests some adverse developments are quite possible,” he said.
