Bank Towers Show from Bay Street in Toronto’s Financial District on Wednesday, June 16, 2010. Adrien Veczan / The Canadian Press
Canada’s major banks are struggling to control rising costs that could consume profits as they face pressure to continue to grow revenue amid growing economic concerns over the impact of inflation and rising inflation. interest rate.
On Friday, the National Bank of Canada closed a solid second-quarter earnings season for the country’s top banks with an 11 per cent increase in profits year-over-year. Montreal-based bank revenues rose 9 percent during the quarter ended April 30, with higher loan balances and commissions as consumers and businesses spend and borrow more.
But the bank’s spending rose 8 percent as it hired staff, increased salaries and invested in technology.
Rising spending leaves banks with little room for error if revenue growth slows. While banks have made higher profits during most of the COVID-19 pandemic and fared better than many companies in other sectors, they are not immune to the high inflation that drives up prices.
Expenditures increased by 13% at the Canadian Imperial Bank of Commerce during the quarter compared to the previous year, and by 5% at Toronto-Dominion Bank, which included a 9% increase in costs in the its Canadian retail banking unit. .
Wages are a major driving force behind rising spending, as tight labor markets that have kept many consumers economically stable also create intense competition for talent. Banks’ investments in technology to improve customer experiences and automate routine tasks, as well as the resurgence of travel and marketing spending as economies reopen, have also made it more difficult to restrict spending.
The impact of inflation “is quite wide,” Hratch Panossian, CIBC’s chief financial officer, said in an interview. “You’re seeing impacts in various categories across the bank,” and the recent pressure on the bank’s costs has been “slightly greater than we expected.”
The struggle to retain employees is adding hundreds of millions of dollars to bank spending, and pressure is being felt everywhere, from executives and technology executives to staff at branches, call centers and later offices. .
In mid-April, TD announced it would give most of its non-executive employees a 3 percent pay rise in July, and RBC soon followed suit, raising the base salary for low-paid staff. Last week, the Bank of Montreal matched those increases, promising a 3% pay rise for certain salary levels, according to Chief Financial Officer Tayfun Tuzun.
For TD, base salary increases will cost an additional $ 290 million a year, Chief Financial Officer Kelvin Tran said Thursday.
“Wages and profits will go up, inflation is high. There are certain expenses that will increase naturally due to what is happening around us, “said Raj Viswanathan, chief financial officer of the Bank of Nova Scotia, who reported a 3% increase in second-quarter costs. predict that these costs will rise more rapidly in the coming quarters, “but we have a number of levers we use in this bank” to control them.
Mr. Panossian said CIBC has “agreed” to some of its planned investments, “so we’ve been reacting and we have the ability to react for the rest of the year.”
At the moment, loan balances are rising at healthy rates, although demand for mortgages is expected to cool, credit card spending is recovering, business lending is strong and interest rates are rising. central bank interest rates are increasing profit margins on lending. “This is a good combination to be able to absorb it,” Bank of America Securities Inc. analyst Ebrahim Poonawala said in an interview.
But if the economy falls into a slump, as economists increasingly fear it might, “I don’t think … these banks have much leverage to pull in terms of absolute cost cuts,” Mr. Poonawala.
“These are like giant ships.… None of this happens overnight,” he said. “When you do these things cross – section [salary] increase, there is very little room to cut costs. “
In a call with analysts on Friday, National Bank Chief Financial Officer Marie Chantal Gingras said the cost increases are “linked to the growth of our business.” But he said the bank is looking for areas to reduce as it has increased salaries to keep pace in a “highly competitive environment” and has increased spending in a number of areas including automation, cybersecurity and regulatory compliance.
“The team is constantly working to identify and achieve efficiencies in our spending base, especially in an inflationary context,” he said.
The National Bank earned $ 893 million, or $ 2.55 per share, in the second quarter. That compares to $ 801 million, or $ 2.25 per share, in the same period last year. On average, analysts expected earnings of $ 2.27 per share, according to Refinitiv.
The bank raised its quarterly dividend by 5 cents, or 6 percent, to 92 cents a share.
Profits rose across the banking sector during the second fiscal quarter, with four of the top six banks exceeding analysts ’expectations by comfortable margins.
The Royal Bank of Canada was more successful in restraining costs during the quarter, up just 1% year-on-year. However, the bank’s salaries increased by 7% over the previous year, “accounting for almost 40% of the increase in our most controllable costs,” said CFO Nadine Ahn. Higher professional fees and technology costs accounted for another 30% increase, and marketing and travel 20%, he said.
One of the reasons RBC was able to control costs in the second quarter was the weaker performance of its capital markets division, where revenues fell 14% from last year’s high levels. This provides “natural, integrated coverage” because it means the bank distributes less bonus to traders and investment bankers, CEO Dave McKay said.
Over the past two years, the rise in capital markets revenue has been “a great help to positive operating leverage,” which is the industry’s term for expenses that exceed expenses, said Mr. Poonawala. But as the frantic activity of trading, IPOs and equity issues has fallen this year, with quarterly capital markets profits falling 26 percent to RBC and 20 percent to BMO, for example, “you see this pain,” he said.
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