Canadian lenders including Royal Bank of Canada and Toronto-Dominion Bank decided more than a year ago to target business loans and wealth management because record consumer lending was bound to dry up.
This week’s first-quarter results show the shift is paying off. Royal Bank, Toronto-Dominion, Canadian Imperial Bank of Commerce and Bank of Montreal all posted earnings that topped analysts’ estimates, while three of them raised their quarterly dividends.
Royal Bank expected “some of that slack to be offset by stronger growth in the commercial side and that’s what we have been experiencing,” Chief Executive Officer Gordon Nixon said yesterday in Calgary, where the bank held its annual meeting.
The resilience of the Toronto-based banks even as Canada’s economy slows has bolstered their share prices. Royal Bank, TD and CIBC hit record highs this year.
Canada’s banks, ranked the world’s soundest by the World Economic Forum for the past five years, have targeted small business lending and mutual fund sales for growth as consumers curb borrowing. Analysts have predicted a slowdown for home loans and lines of credit after household debt reached a record 165 percent of disposable income in the third quarter.
“I’m not surprised to see such a pickup in business lending,” said Tom Lewandowski, a bank analyst at Edward Jones & Co. in St. Louis. “I’m more surprised that we haven’t seen a more significant slowdown in residential and personal lending.”
Consumer banking represents the largest segment of profit for Canadian banks, representing over half of Royal Bank’s C$2.07 billion in net income in the quarter, and almost 70 percent of Toronto-Dominion’s C$1.92 billion in profit.
“The consumer in Canada, we’ve been calling for them to back off now for two or three years,” Nixon said. “The good news is we were wrong for a couple of years, but unfortunately it’s going to happen.”
Royal Bank’s personal and commercial banking profit, which includes operations in Canada and the Caribbean, climbed 11 percent to C$1.12 billion ($10.9 billion). Results at Canada’s biggest bank were bolstered by business banking revenue, which has climbed 16 percent in the past two years.
“Consumer lending will have an impact on their earnings in the coming quarters,” said Kash Pashootan, a portfolio manager with Raymond James Ltd. in Ottawa, who manages C$125 million, including bank shares. “The question is how will they replace those earnings, whether in other geographies or other business lines.”
Earnings at Toronto-Dominion’s Canadian bank climbed 11 percent to C$944 million, while its U.S. consumer bank profit rose 9.4 percent to C$385 million -- both records. TD Bank said a year ago that it would focus on Canadian corporate lending, increase the number of business bankers, and recently began targeting U.S. companies through its TD Securities investment bank.
In Canada, “I think you’ll see the rates of lending growth slow down on the personal side,” Toronto-Dominion Chief Financial Officer Colleen Johnston said yesterday in a telephone interview. “An area of huge growth for us, though, has been on the business banking side. That’s an area where we’ve really taken a lot of market share.”
CIBC’s consumer and commercial banking profit was C$611 million, a 7.8 percent increase from the year-earlier period. The lender expects that “demand for business credit should continue at a healthy growth rate,” according to its statement.
Both Toronto-Dominion, the second-largest bank, and CIBC, the No. 5 bank, cited record mutual fund sales in their branches, while Royal Bank’s mutual fund revenue jumped 19 percent to C$594 million from the year-ago period.
Lewandowski said that while business banking and increases to mutual fund sales will help offset any mortgage slowdown, it may not be able to “pick up the slack for what I think are going to be some pretty significant headwinds in those personal loan categories.”
National Bank of Canada, which also reported first-quarter results yesterday, said larger competitors continue to compete for business bank clients in its home province of Quebec.
“Especially in Quebec, we feel the presence of the others,” National Bank Chief Financial Officer Ghislain Parent said today in a telephone interview. Still, “the bank has very, very strong roots with the corporate world and the commercial world in Quebec, and that will continue,” he said.
Canada’s housing market has slowed in recent months. New home construction plunged 19 percent in January from December to the lowest since the end of 2009, while sales of existing homes fell 8.8 percent from a year earlier.
Recent data suggest the broader economy is weak as well as the nation’s exporters struggle to sell goods abroad. Statistics Canada releases fourth-quarter growth figures today that are projected to show output stalled at an annualized 0.6 percent in the last three months of 2012, according to economists surveyed by Bloomberg News.
The slowdown did not show up in Royal Bank’s mortgage balances. The bank said its average balances for Canadian residential mortgages was C$175.5 billion in the first quarter. That compares with C$174.3 billion in the fourth quarter and C$167.1 billion in the first quarter of 2012.
“Although Canadian banks are entering a potentially difficult market in 2013, they are building off huge strength and that they should and will continue to build in the future,” said Diane Kazarian, Canadian financial services leader at PricewaterhouseCoopers LLP, said in an interview. “The theme is in the new normal ... capitalize on your opportunities. We believe that they will; they’re smart.”