Credit quality is deteriorating in Canada, and banks are feeling the impact.
Toronto-Dominion Bank and Canadian Imperial Bank of Canada both reported fiscal first-quarter results that included higher provisions for loan losses, contributing to earnings that missed analysts’ estimates.
Toronto-Dominion, Canada’s second-largest lender by assets, set aside $850 million for soured loans in the quarter ended Jan. 31, up 23 per cent from a year earlier and the highest level in at least two years. The lender’s Canadian and U.S. retail divisions had roughly equal shares of the provisions, at about 36 per cent each of the total, with the rest recorded mainly in the bank’s corporate segment.
“The fourth quarter and the first quarter of the year always tend to have elevated provisions because of the holiday spending season, so we tend to see that seasonality in cards and auto,” Toronto-Dominion’s Chief Financial Officer Riaz Ahmed said in a phone interview Thursday. “In Canada, bankruptcies are up a little bit and we do see a little bit of rise in delinquency in our retail cards in the U.S. None of them would rise to the level of being of particular concern for us.”
CIBC’s provisions more than doubled across the bank, surging to $338 million — also the highest in at least two years. Most came from Canadian personal and small-business banking, the lender’s largest division, which saw a 41 per cent jump in provisions to $208 million. Canadian commercial banking set aside $43 million for credit losses, while the U.S division earmarked $16 million for provisions and its capital-markets unit had $66 million.
“A lot of the impairments that took place this quarter felt like unique events which I’d like to think won’t transpire again,” CIBC Chief Risk Officer Laura Dottori-Attanasio said on the company’s earnings conference call Thursday. “We’re not seeing any systemic or any trends of concern in our book. We continue to have strong credit quality.”
The banks’ calculations for loan-loss provisions in the year-earlier period were affected by accounting changes.
The two Toronto-based banks also followed their Canadian rivals in reporting poorer performance in their capital-markets operations, driven down by trading in a period company executives have called challenging.
Toronto-Dominion’s capital-markets results were the worst among the big Canadian banks, with a $17 million loss in the quarter from its TD Securities business as investment-banking fees fell and trading revenue was halved from a year earlier.
“The wholesale banking business is rarely part of the investment thesis for TD, but it nevertheless forms an important part of the bank and one that can swing numbers,” Robert Sedran, an analyst at CIBC Capital Markets, said in a note to clients. “Swing numbers it did, moving to a loss that took the overall results notably below consensus, even before considering the higher loan losses.”
Trading at the company’s TD Securities division totalled $251 million, down from $515 million a year earlier.
Toronto-Dominion’s CFO cited “significant market volatility” for what he described as a “challenging quarter” for the wholesale division. “The revenue was down as volatile markets made trading conditions difficult and kept clients on the sidelines,” Ahmed said.
CIBC Capital Markets, meanwhile, had earnings of $201 million, down 38 per cent from a year earlier, with the bank citing lower revenue from equity derivatives and interest-rate trading businesses along with higher loan-loss provisions.
Toronto-Dominion reported fiscal first-quarter net income that rose 2.4 per cent from a year earlier to $2.41 billion, or $1.27 a share. Adjusted per-share earnings totalled $1.57, missing the $1.71 estimate of 12 analysts in a Bloomberg survey.
CIBC’s first-quarter net income fell 11 per cent to $1.18 billion, or $2.60 a share. Adjusted per-share earnings totaled $3.01, missing the $3.09 average estimate of 12 analysts in a Bloomberg survey.