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Canadian Banks Beat Profit Forecasts

08/27/2015 | 05:51pm US/Eastern
By Rita Trichur 

Canada's biggest banks posted higher profits in the fiscal third quarter, surpassing expectations and sidestepping the effects of a stumbling Canadian economy.

Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Royal Bank of Canada, National Bank of Canada and Bank of Montreal all trumped analyst forecasts for the May-to-July quarter. Those results have set the bar for Bank of Nova Scotia, which will close out the earnings season on Friday.

The industry's resiliency comes as Canada's economy has been hit hard by falling prices for its top export, crude oil. The economy shrank in the first five months of 2015, casting a pall over banks since they generate most of their profits in their home market.

In the lead up to the third-quarter reports, analysts predicted that sinking oil prices and slower lending growth would pinch results. Although there were signs that the operating environment is turning in Canada, the fallout for banks has been minimal to date.

"With five banks down we have five [earnings] beats," wrote Meny Grauman, an analyst with Cormark Securities Inc., in a research note to clients. "Although the big question was just how much of that is just a function of unduly pessimistic expectations?"

Although bank stocks traded higher Thursday, the TSX's composite bank index remains down roughly 8% this year as Canada's economic woes dog the sector. Bank executives, though, remain cautiously optimistic about the outlook.

"Overall, 2015 is shaping up to be a good year for TD ahead of our expectations," Chief Executive Bharat Masrani said on an afternoon conference call with analysts.

Provisions for credit losses, the amount of money the bank sets aside to cover bad loans, increased to C$437 million from C$338 million. But executives see no reason to fret about deteriorating credit quality at this stage.

TD has a relatively small exposure to oil. As a result, the bank doesn't expect "material losses," Mr. Masrani said.

The bank also sees brighter prospects in the U.S., where the economy is growing at a faster-than-expected clip. TD operates more branches in the U.S. than in Canada.

During the third quarter, TD earned an adjusted profit of C$1.20 a share largely on the strength of its retail operations, beating the Thomson Reuters mean estimate of C$1.17 a share.

TD also reclaimed its title as Canada's largest bank by assets, moving ahead of longtime rival RBC. TD ended the quarter with total assets of C$1.099 trillion, topping RBC's C$1.085 trillion.

Earlier Thursday, smaller CIBC, the country's No. 5 lender, reported an adjusted third-quarter profit of C$2.45 a share, which also surpassed analyst expectations.

Like RBC, which reported on Wednesday, CIBC trimmed its provision for credit losses in the latest period. CIBC's provision was C$189 million, down 3% from a year earlier.

"CIBC incurred a modest increase in energy impaired loans, but not to the same degree as either BMO or [RBC]," wrote John Aiken of Barclays Capital. "Further, gross impaired loans were down sequentially and against a year ago."

CIBC also announced a new share buyback plan and its fourth consecutive dividend increase, bringing its payout to C$1.12 a share.

"Although the headwinds from a low interest rate environment and prolonged oil prices persist, we're confident that our earnings power, high-quality loan portfolio and strong balance sheet will allow us to maintain this higher level of dividend," said Chief Executive Victor Dodig on a conference call.

Analysts also gave CIBC, which is often criticized for being overly reliant on the Canadian market, top marks for its domestic retail banking results.

"With only one bank left to report, we expect [CIBC] to report the industry's highest earnings growth this quarter," wrote Mario Mendonca of TD Securities Inc.

Carolyn King contributed to this article.

Write to Rita Trichur at rita.trichur@wsj.com

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