Mortgages and consumer debt now in the spotlight in mixed results year
? BARBARA SHECTER
The Vancouver Sun
It was a mixed year-end for Canada’s biggest banks, with two beating analyst expectations with fourth-quarter financial results released this week and two disappointing, as concerns over the fallout from low oil prices give way to scrutiny of mortgages and consumer debt.
Canadian Imperial Bank of Commerce topped profit expectations Thursday with quarterly results that included posting double-digit mortgage growth driven by two of the country’s hottest markets: Toronto and Vancouver.
Toronto-Dominion Bank, meanwhile, disappointed with weak performance in its retail operations and higher than expected provisions and expenses in the quarter.
The one per cent year-over-year decline in TD’s Canadian personal and commercial banking, though small, “implies this very important segment will underperform peers again this quarter,” Rob Sedran, a bank analyst at CIBC Capital Markets, said in a note to clients.
CIBC shares rose to a 52-week high of $108.05 in early trading, while TD’s stock price opened higher than Wednesday’s close of $63.57, but then fell slightly.
Earlier this week, Bank of Nova Scotia exceeded earnings expectations for the fourth quarter, propelling shares of four of the Big Five banks to 52-week highs, while Royal Bank of Canada came in below expectations largely as a result of lower trading revenues. Bank of Montreal turns in its fourth quarter results next Tuesday.
CIBC, Canada’s fifth-largest bank, boosted net income nearly 20 per cent in the fourth quarter to $931 million ($2.32 a share). After usual items, core cash earnings of $2.60 topped the consensus analyst estimate of $2.49, reflecting growth in retail and business banking, wealth management, and capital markets. The bank increased its quarterly dividend by 3 cents, or 2.5 per cent, to $1.24.
Mortgage volume was up 11 per cent in the quarter, as CIBC continued to increase business through a growing proprietary sales that replaced the widespread use of mortgage brokers.
On a conference call with analysts, the bank’s executives said that the mortgage growth translated into other business as the mortgages acted as an anchor product to build deeper relationships with clients. Personal deposits were up eight per cent, while business deposits were up 10 per cent and business lending was up 13 per cent.
Gabriel Dechaine, a bank analyst at Canaccord Genuity Corp., described the mortgage growth was “frothy” in a note to clients. But he said enhanced disclosure from CIBC on its consumer lending book including mortgages “should alleviate some concerns.”
The bank disclosed that uninsured mortgages it holds in the Greater Vancouver Area and Greater Toronto Area have lower delinquency rates of 90-plus days than the Canadian average.
In addition, the average loan-to-value is lower: 46 per cent in Vancouver and 53 per cent in Toronto, compared to 56 per cent across Canada.
David Williamson, group head of retail and business banking at CIBC, said the relatively small loans as a percentage of the value of the real estate, particularly in Vancouver, provide “a tremendous amount of buffer.”
CIBC also disclosed that less than one per cent of the portfolio consists of what are considered higher-risk mortgages in the industry with a loan to value of more than 75 per cent and a Beacon score — used to measure creditworthiness — of 650 or lower.
Dechaine said he views the bank’s recent mortgage growth trends as indicative of earnings growth deceleration in the future, rather than a credit risk.
In the rest of CIBC’s closely watched consumer book, Barclays Capital analyst John Aiken noted that while credit card write-offs were essentially flat, there was an uptick in impaired loan formations. In addition, credit cards with delinquencies of 90 days or more increased by five basis points.
Analysts said the strain on consumer loans is so far tied mainly to oil-dependent provinces including Alberta.
On an afternoon conference call, TD executives characterized consumer losses in oil and gas regions as “stable” at Canada’s second-largest bank.
Overall, TD posted adjusted earnings excluding unusual items of $2.3 billion ($1.22 per share) for the fourth quarter, up seven per cent from a year ago.
CIBC, meanwhile, continued restructuring efforts in the quarter, taking a charge that reduced reported earnings by almost $100 million.
Banks have been cutting staff and investing in technology as customers do more banking online, and such restructuring charges have become common, though Canaccord Genuity’s Dechaine said this is likely to be the last large one for CIBC for the time being.
The bank has taken combined pre-tax charges of $430-million in 2015 and 2016, which are intended to reduce ongoing annual costs by $350-million by next year and $500 million by fiscal 2019.
CIBC became the second Canadian bank this week to reduce target return on equity. In CIBC’s case, the target is now 15 per cent or more. On Wednesday, Royal Bank of Canada reduced its target return on equity to 16 per cent or more.
On CIBC’s morning conference call, chief executive Victor Dodig said the change “reflects regulatory and market pressures on the bank’s globally,” as well as CIBC’s strategy to expand in the United States where ROEs are typically lower.
He said CIBC expects to close its US$3.8 billion acquisition of Chicago-based PrivateBancorp Inc. in the first quarter.
© 2017 National Post
