TD Bank Group and CIBC in turn posted lower profits. Banks are positioning themselves in the face of rising interest rates.
TD reported lower third-quarter profits as it made a major adjustment related to its impending acquisition of US bank First Horizon and set aside money for possible loan losses due to the deteriorating economic outlook.
The bank said it earned $3.21 billion in revenue for the quarter ended July 31, up from $3.55 billion over the same period last year. Earnings included a net loss of $678 million to account for interest rate volatility that could affect the cost of completing the US$13.4 billion First Horizon deal.
While rising interest rates have pushed up the cost of the transaction, TD Chief Financial Officer Kelvin Tran said in an interview that the bank would benefit overall from higher rates. “Rate hikes in general are good for TD, because we have a strong consumer deposit allowance…sometimes too much of a good thing might not be so good from a demand slowdown standpoint, but in the third quarter, we continued to see strong customer activity,” Mr. Tran explained.
TD set aside $351 million in the last quarter for potential loan losses as raising interest rates to rein in inflation raises the risk of pushing the economy into a recession. Last year, the bank recovered 37 million in credit losses, as banks unwound provisions they had made at the start of the pandemic.
The bank is actively pushing further in the United States, both through its First Horizon deal first proposed in February and through its $1.3 billion deal announced Aug. 2 to buy the new brokerage firm. Cowen Inc.
TD has faced some setbacks in its expansion, however, due in part to a letter published this week by the Center for Responsible Lending calling for the blocking of the First Horizon deal. The center and several other groups that have signed it have raised concerns about both increased consolidation in U.S. banking and TD’s track record of overdraft fees in recent years, where the bank reached a US$122 million settlement with regulators for unfair and deceptive practices.
Tran said he expects the merger to close on time by the end of January, while TD plans to invest to benefit communities.
The bank said earnings were $1.75 per share for the quarter ended July 31, compared with $1.92 per share in the same quarter a year ago. On an adjusted basis, TD says it earned $2.09 per share in the third quarter, up from adjusted earnings of $1.96 per share in the same quarter last year.
CIBC increases provisions
CIBC also reported lower earnings from the same period last year as it set aside more money for potentially bad loans amid rising interest rates. interest.
The bank reported net profit of 1.67 billion in the third quarter, down from 1.73 billion in the same quarter last year. Money set aside for potential loan losses totaled 243 million, compared with a reversal of credit losses that stood at 99 million in the third quarter of last year.
All banks reporting results have so far increased their loan reserves as the economic outlook deteriorates due to the central bank raising interest rates, which has led to slower inflation, although CIBC saw a smaller increase in provisions than some other banks this quarter, as it was the only one to increase provisions last quarter.
CIBC invested heavily in customer acquisition, including a rebranding and its purchase of the Costco credit card portfolio, which helped drive spending up 9% from a year ago and 2% compared to the previous quarter. The strategy has enabled the bank to add more than 300,000 customers over the past year, while the nearly 4,000 employees specializing in creating business with affluent and high net worth customers have helped ensure that about 25% of the additions fall into the affluent category, CIBC chief executive Victor Dodig said on a call with analysts on Thursday.
CIBC also stressed that the acquisition of the Costco portfolio will result in more customers, with approximately 20,000 franchisees so far, said Laura Dottori-Attanasio, group head, Personal and Small Business Banking, in Canada.
Shawn Beber, chief risk officer, said on the mortgage front, about $19 billion in fixed rate mortgages and $7 billion in variable rate mortgages are up for renewal over the next 12 months, but only a quite a small portion involves customers who are seen as having higher credit risk and have high loan-to-value ratios on their mortgages.
The bank said its net income was $1.78 per share for the quarter ended July 31, compared with $1.88 per share a year earlier. On an adjusted basis, CIBC said it earned $1.85 per share, compared to adjusted earnings of $1.96 per share a year ago.