The effects of the sharp rise in inflation and the central bank’s efforts to contain it by slowing the economy were felt in the second quarter results of the major Canadian banks.
Four of the country’s big five banks posted earnings below expectations as they set aside larger sums of money for bad debts and struggled to contain rising costs. In addition, many have seen their income suffer from slower loan growth.
CIBC was the lone exception, with its results reported on Thursday coming in better than analysts had expected.
Although mortgage growth in Canada has slowed sharply, with several banks posting flat results from the previous quarter, attention these days has turned to what is happening with the U.S. operations of banks, on the heels of a few high-profile bank failures.
Several bank executives spoke of tougher economic conditions, while TD Bank warned of tougher days ahead, saying it no longer expects to meet its medium-term earnings growth target. The recent abandonment of TD’s proposed $13.4 billion takeover of US bank First Horizon played a key role in reporting results below expectations, but the bank also cited the “deterioration of the macroeconomic environment”.
TD Chief Executive Bharat Masrani said in a statement that the bank was navigating an “unpredictable operating environment.” It posted a profit of $3.35 billion for the second quarter, down from $3.81 billion in the same quarter last year. Its provisions for credit losses were $599 million, down from just $27 million a year ago.
Spending up
In a conference call, Royal Bank Chief Executive Dave McKay told investors that while the immediate financial risks of banking in the United States have subsided, there are bigger changes afoot. which will have longer term implications.
“Markets face structurally different circumstances after the end of an era of low inflation, low interest rates and increased globalization,” he said.
Cost inflation has been a challenge for Canadian banks as competition intensified last year to recruit employees, especially those with technology expertise. The trend has since reversed, but higher salaries always mean higher expenses, and sometimes more staff than needed.
The Royal, which reported spending up 16% from the previous year, did not expect high attrition rates to normalize “almost overnight”, McKay suggested. ” We exceeded. We passed thousands of people. This is a real drag on our cost structure. »
The bank attributes about half of its spending growth to acquisition-related costs and macroeconomic factors, while it plans to reduce the other half through slower hiring and attrition, among other levers. “One of my top priorities is increased cost discipline,” McKay said.
Royal Bank posted a profit of $3.65 billion for the quarter ended April 30, which compares to $4.25 billion in the same quarter last year. Its provisions for credit losses were $600 million, compared with a recovery of $342 million a year earlier.
Exposure to commercial loans
Banks faced pressure from lower interest earnings, while customers shifted to higher interest term deposits and banks generally struggled with increased funding costs.
CIBC managed to post net interest margin gains and hold expense growth to 1% year-over-year—or 7% adjusted—as it emerged from a major expansion program, which helped boost its profits to $1.69 billion from $1.52 billion last year. CIBC was also one of the first to put money aside for bad debts, so its $438 million provision for credit losses didn’t rise that much from its $303 million of the second quarter of last year.
Like other banks, CIBC sought to reassure analysts that its commercial lending exposure, particularly to U.S. office space, was under control amid mounting concerns over to any future impairments. Its chief executive, Victor Dodig, said office loans accounted for about 2% of the bank’s overall loan portfolio and that the current situation would not last.
“We recognize the volatility. We will get through this. We will get through this. And I’m confident that values are resurfacing and investors will start showing up to grab those properties, and people will start coming back to the office more. »
Bank of Montreal and Scotiabank also sought reassurance on commercial lending on Wednesday as they posted lower profits than a year ago due to higher expenses, loan loss provisions and a slowdown in loan growth. For the coming quarters, banks say credit conditions are expected to return to historic norms, after the pandemic years left many consumers with extra cash, which they are only just beginning to run out.
A variety of factors such as higher interest rates, sustained inflation and other headwinds could dampen risk appetite and revenue growth, CIBC Chief Financial Officer Hratch Panossian warned. “We understand that the environment is normalizing. The cost of credit will increase, revenues could slow. We control the things we can control. »