As consumers open their wallets, the rise is pushing companies to borrow and invest to meet that demand, which has helped increase commissions and interest income raised by banks. Christopher Katsarov / The Canadian Press
Rising consumer spending and business investment are increasing the profits of three of Canada’s largest banks as customers travel and dine more often, and bankers expect this growth to continue, perhaps at a slower pace. , even amid growing fears of an economic recession.
Royal Bank of Canada and Toronto-Dominion Bank reported earnings for the second fiscal quarter ended April 30, which exceeded estimates, while Canadian Imperial Bank of Commerce’s earnings fell short of expectations. as their costs increased. All three banks saw their income and loan balances in their core Canadian retail and commercial banking operations record large gains compared to the previous year.
As consumers open up their portfolios, the rise is pushing companies to borrow and invest to meet that demand, which has helped increase commissions and interest income raised by banks.
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But one of the key questions banks faced on Thursday was whether the trend will continue in the face of high inflation, a rapid rise in interest rates and growing sadness over the prospect of an economic downturn. Investors and analysts are concerned about whether demand for loans could decline and defaults on existing loans could rise if economies move into a recession.
Banks say their customers are still optimistic and that the underpinnings of retail banking seem strong enough to withstand some headwinds against the economy.
“There seems to be more caution,” Hibatch Panossian, CIBC’s chief risk officer, said in an interview. “But right now, on the ground with our customers, there is still a relatively high level of confidence and a relatively high level of activity as the economy has opened up, the service sectors are coming back.”
On Wednesday, Bank of Nova Scotia and Bank of Montreal reported higher second-quarter profits and rising loan balances, and executives from both banks offered optimistic outlooks for the financial sector.
There are two key factors that strengthen banks’ confidence: a tight labor market that has Canada’s unemployment rate at its lowest level in decades, and the financial cushion that many customers created during the COVID- pandemic. 19 in the form of higher savings and lower debt.
As public health restrictions lifted, spending rose again. RBC customers’ credit and debit transactions were 30 percent higher in April than before the pandemic, and that momentum continued in May, CEO Dave McKay said. According to Mr. Tran, TD’s credit card retail sales increased 22% year-over-year. And at CIBC, card purchase volumes increased 30% from the previous year, excluding the new Costco brand credit card portfolio acquired by the bank.
“We’ve seen, I’ll say, a full recovery in the categories that are travel, hotel, entertainment,” Laura Dottori-Attanasio, CIBC’s head of personal banking and small business, said at a conference Thursday.
This spending could be under pressure as inflation and rising interest rates drive up borrowing prices and costs for customers. “It will definitely affect their discretionary income … and consumers will have to make decisions,” Kelvin Tran, TD’s chief financial officer, said in an interview.
“But I think for the consumer, what’s a very important factor is the unemployment rate,” Mr. Tran. “If people have a paid job and we continue to see it [labour] The market is still very tight, that increases confidence. “
Many clients also have more financial leeway in the form of lower personal loan debts as well as higher savings. At CIBC, credit line usage rates are about 20 percent lower than in 2019, and the rate of revolving credit card balances has dropped by 7 to 10 percent.
“We feel really good about the health of the consumer,” Ms. Doctors-Attanasio. “We’re seeing very cautious behavior when it comes to how people manage their debt and how they make payments with their credit cards.”
While bankers are confident that their customers are resilient, they are still struggling to predict how the economy will react to rising interest rates. McKay said central banks “must hit demand very hard” to curb inflation. “Shall we land it with a slight recession? I think our message today is that it could go either way, it’s 50-50. That said, … there are good shock absorbers to absorb this uncertainty.”
During the second fiscal quarter, RBC earned $ 4.25 billion, or $ 2.96 per share, compared to $ 4 billion, or $ 2.76 per share, a year earlier. Adjustedly, RBC said it earned $ 2.99 per share, beating an estimate of $ 2.71, according to Refinitiv.
TD reported net income of $ 3.8 million, or $ 2.07 per share, helped by a one-time increase of $ 224 million from a demand agreement. TD’s adjusted earnings were $ 2.02 per share, slightly lower than the previous year, but ahead of consensus analysts ’forecast of $ 1.93 per share.
And CIBC earned $ 1.52 billion, or $ 1.62 per share, compared to $ 1.65 billion, or $ 3.55 per share, in the same quarter last year, before that the bank completed a 2 by 1 stock split. CIBC said it earned $ 1.77 per share on a tight basis, just below analysts’ estimates of $ 1.80 per share.
RBC raised its quarterly dividend by 8 cents a share to $ 1.28, and CIBC raised its dividend by 2.5 cents a share to 83 cents.
RBC and TD continued to eliminate the large loan loss reserves they stored to protect themselves from the possibility that COVID-19 could increase losses. RBC recovered $ 342 million in provisions for credit losses during the quarter. TD allocated just $ 27 million in total new provisions, while releasing some other reserves as the loans are repaid.
Executives at the two banks said their credit expectations are more optimistic now that pandemic-related risks have receded. But each bank also incorporated more pessimistic assumptions into the models they use to predict future losses, recognizing that the odds of some kind of economic recession are rising.
“Omicron did not make a big impact [provisions] so it was a favorable factor this quarter, “Mr Tran said.” And then you added something that’s less favorable, which is that uncertainty, that perspective. “
With a report by Tim Kiladze
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