Earnings from CIBC today represent the last of Canada’s Big Six banks to report third-quarter results. Below, we catch up on the banks’ results – and how their growing rainy-day funds could signal trouble ahead for consumers and businesses across North America.
Up top
Nvidia wins and loses: The AI giant might have beaten Wall Street estimates as its profit jumped – buffeted by the chipmaking dominance that has cemented Nvidia’s place as the poster child of the artificial-intelligence boom – but investors seemed less than impressed.
Charging ahead: Malahat Nation and Energy Plug Technologies Corp. are launching construction on a $57-million battery assembly factory on Vancouver Island, a venture the First Nation hopes will provide it with a new economic base and jobs.
French connection: The arrest of Telegram’s chief executive marks an escalation of governments’ struggles to curb illegal activity online. Canadian Paul Krusky, who is accused of facilitating organized crime through an encrypted phone company he operated, is also in French custody.
Wonderwall
Are Liam and Noel really going to make £50-million? Perhaps.
I said maybe, but only because that amount hasn't been confirmed yet. Regardless, this mural photographed yesterday in Manchester sure makes for a wonderful wall. That £50-million figure might just be the a wisp of the windfall, as the brothers likely stand to reap even more from merch sales, branding and sponsorship deals. Which is more profitable: Looking back in anger, or going to let it out?Getty Images
In focus
Bank earnings roundup: Why we’re reaching for our umbrellas
First, on provisions for credit losses: or PCLs, for short. It refers to the amount of money companies set aside owing to potential losses anticipated because of credit risk. Broadly, the banks look at two buckets: “impaired” loans that are past due, and an estimated number of loans expected to go bad based on a wider economic outlook.
Why they’re in the spotlight now: Analysts were expecting PCLs to increase at most banks this quarter, as high interest rates have put greater strain on borrowers among both households and businesses.
But investors have been closely watching how much those funds have changed, and why. For example, BMO’s provisions were higher than anticipated and the stock took a big hit. RBC’s provisions, while higher than a year ago, were lower than expected, which looks like good news for the bank.
What we can learn from the earn(ings): A few things stand out to reporter James Bradshaw. He told me the provisions show that the banks face the same strains, but they’ve felt that impact on different levels.
The fact that some banks have reported profits that are better than expected while others have fallen short of analysts’ forecasts hints at the fact that this is a volatile period for banks, “and there are lots of competing forces at play,” Bradshaw said.
- In general, the banks’ earnings have held up pretty well in increasingly challenging conditions. But as the pressure on their customers builds, that’s typically when we start to see which banks have been the most diligent about choosing which loans to make.
Looking ahead, though, Bradshaw said it remains to be seen whether potential further rate cuts by central banks will ease the pressure on borrowers. Here’s a quick snapshot of how the banks’ provisions paint a challenging picture ahead.
Breaking it down
CIBC: Last but not least
Canadian Imperial Bank of Commerce has reported a rise in third-quarter profit on Thursday, as the lender set aside smaller funds to cover potential loan losses.
Provision for credit losses was $483-million in the quarter, down $253-million compared with a year earlier.
Adjusted net income rose to $1.90-billion or $1.93 per share from $1.48-billion or $1.52 per share a year earlier.
TD’s troubles weigh on growth plans
Toronto-Dominion Bank reported its first quarterly loss in 21 years after it set aside a US$2.6-billion provision to pay anticipated regulatory fines over anti-money-laundering failures.
That will be on top of its provision for credit losses, which rose to $1.07-billion, compared with $766-million a year ago.
TD has been mired in multiple U.S. regulatory and criminal probes over serious deficiencies in anti-money-laundering programs, which missed financial crimes carried out through its branches. The bank said last week that it is bracing for a total fine of more than US$3-billion ($4-billion) – its “current estimate.”
Scotiabank: Strain in Latin America
Bank of Nova Scotia reported lower fiscal third-quarter profit that still beat analysts’ estimates as it set aside more money to cover future losses on loans, with customers in Canada and Latin America feeling the strain from higher interest rates.
The bank earmarked $1.05-billion of provisions for credit losses, compared with $819-million in the third quarter last year.
The bank’s provisions for impaired loans, make up the lion’s share of that amount, jumping 31 per cent higher to $970-million, as more borrowers fell behind on payments. Many of those customers were in three of Scotiabank’s key markets in Latin America: Colombia, Chile and Peru. Provisions also increased for Canadian banking clients, mostly on car loans as well as credit-card balances.
BMO: Same issues, but worse
Bank of Montreal reported a profit lower than analysts’ estimates. While each bank is bracing for economic headwinds, the amount BMO set aside attracted more scrutiny.
BMO set aside $906-million to cover possible losses on defaulting loans – up from $492-million a year earlier. The bank cited the same environment of high interest rates and economic uncertainty for having an “acute impact” on loan impairments.
But analysts seemed unconvinced. Jeffries Securities analyst John Aiken downgraded his rating on BMO’s stock, highlighting the pace of deterioration in credit and BMO’s relative overexposure to risky commercial loans.
“We freely admit that we may be closing the barn door after the animals have escaped,” Mr. Aiken wrote in a note to clients. Last month, RBC analyst Darko Mihelic said BMO’s credit deterioration appears to be occurring at a faster pace than its U.S. peers, “despite having a remarkably similar loan mix.”
RBC sees effect of HSBC deal
Royal Bank of Canada surpassed analysts’ estimates, reporting a third-quarter profit of $4.49-billion, up from $3.86-billion a year earlier.
Provisions for credit losses were $659-million, up $43-million or 7 per cent from a year ago. The bank attributed the increase mainly to higher provisions in personal and commercial banking, offset by lower provisions in capital markets and wealth management.
RBC said the addition of HSBC Bank Canada increased its net income by $239-million for the quarter.
National Bank of Canada: Beats estimates amid Western push
The smallest of the Big Six posted profits that exceeded analysts expectations on Wednesday, a week ahead of a key vote on the country’s sixth-largest bank’s proposed $5-billion takeover of rival Canadian Western Bank.
The bank reported $149-million of provisions for credit losses, up 34 per cent from $111-million in the same quarter last year. The increase came partly from personal loans, including credit-card balances. But the bank’s ratio of provisions to total loans, at 0.25 per cent, was still comparatively low.
The stronger-than-expected financial results come as National Bank seeks regulatory and shareholder approval for its proposed takeover of Edmonton-based Canadian Western. The transaction, announced in June, would dramatically increase National Bank’s presence in Alberta and B.C.
With reports from James Bradshaw, Pippa Norman and Andrew Willis
The outlook
Today: Beyond CIBC, earnings of note today include Dell Technologies Inc.; Dollar General Corp.; and Lululemon Athletica Inc. I’ll try to tie Dell and Dollar General’s earnings with Lululemon but it might be too much of a stretch.
Tomorrow: Canada reports real gross domestic product growth – a measure that adjusts for inflation – for June and the full second quarter.
Next week: On Wednesday, Alimentation Couche-Tard Inc. makes its first earnings report since we learned of its takeover bid for the parent of rival 7-11. Andrew Willis says the blockbuster deal could give big pensions a chance to be Canadian champions.
Morning markets
Global markets steadied near record highs even after AI powerhouse Nvidia reported results yesterday that, while beating expectations, didn’t impress investors. Wall Street and TSX futures were pointing higher.
Overseas, the pan-European STOXX 600 was up 0.64 per cent in morning trading. Britain’s FTSE 100 advanced 0.29 per cent, Germany’s DAX gained 0.6 per cent and France’s CAC 40 added 0.63 per cent.
In Asia, Japan’s Nikkei closed 0.02 per cent lower, while Hong Kong’s Hang Seng rose 0.53 per cent.
The Canadian dollar traded at 74.32 U.S. cents.