RBC CEO Dave McKay was one of a handful of bank executives who warned about the economic risks of looming U.S. tariffs as the Big Six banks reported quarterly earnings this week.Frank Gunn/The Canadian Press
Canada’s biggest banks are warning that a looming trade war with the United States would further pressure the country’s slowing economic growth, prompting businesses to hold off on investment plans and deal making.
The country’s Big Six banks posted first-quarter earnings this week that beat analyst expectations, even as chief executive officers cautioned that tariffs would drag on the economy if politicians fail to address barriers to productivity.
Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T and Canadian Imperial Bank of Commerce CM-T posted first-quarter profits Thursday, closing out bank earnings season for the country’s six largest lenders.
Profits jumped on higher capital markets and wealth management activity boosted by market swings caused by the U.S. presidential election, even as the banks set aside more reserves for potential loan losses.
But as uncertainty around trade policy and geopolitical tensions rises, clients are already starting to pause their investing and borrowing decisions, RBC CEO Dave McKay said during a conference call.
“We are seeing signs of lower business confidence with some of our commercial banking clients opting to delay certain investment decisions,” he said. “Furthermore, Canadian housing activity remains modest despite tailwinds from lower interest rates and changing mortgage rules.”
He said Canada should improve access to major global markets to provide the “natural and human resources that the world is looking for.” Governments should also revive the country’s economic productivity and competitiveness by removing interprovincial trade barriers, and by improving energy and infrastructure projects, he added.
CIBC CEO Victor Dodig called on the federal government to reassess the Digital Services Tax, which is levied on revenue generated by foreign technology companies in Canada.
The U.S. also accused Canada of being a dumping ground for cheap steel. If aluminum and steel “is indeed getting dumped through Canada, we should definitely halt it,” Mr. Dodig said on a conference call.
“I think those facts would basically address some of the issues that our American trading partners have identified.”
As TD remediates its anti-money-laundering failures, its home market in Canada is core to the bank’s strategic review.
The country’s economic growth is slowing, and a trade war would put further pressure on unemployment and investment. But a deteriorating macroeconomic environment also provides the bank with greater opportunity, according to TD chief financial officer Kelvin Tran.
“When there’s uncertainty, we see that as a huge opportunity for the bank,” he said in an interview. “That means our customers would need more advice on financial plans.”
Even if the situation takes a turn for the worse, each of the banks said it has adequate capital and funding to endure a trade war or economic downturn.
The banks have said they could continue to return capital to shareholders though buybacks, given their high capital levels.
“With a strong balance sheet, liquidity position, credit quality and operating momentum, we’re comfortable that we have the strength to withstand whatever is coming at us while also continuing to look to the buyback,” CIBC CFO Robert Sedran said in an interview.
RBC’s net income climbed 43 per cent to $5.1-billion, in the three months that ended Jan. 31. On an adjusted basis, it earned $3.62 a share, topping the $3.25 a share analysts expected.
TD’s profit fell by 1 per cent to $2.79-billion in the quarter. The bank posted $2.02 a share on an adjusted basis, beating the $1.96 a share analysts estimated.
CIBC reported profit of $2.17-billion, a 26-per-cent jump from the same quarter last year. On an adjusted basis, CIBC earned $2.20 a share, edging out analysts’ expectations of $1.96 a share.
Bank of Nova Scotia BNS-T, Bank of Montreal BMO-T and National Bank of Canada NA-T also reported earnings that beat analyst expectations earlier in the week.
Profits at all six banks were bolstered by a jump in capital markets and wealth management activity, but the strong first-quarter performance was overshadowed by concerns about deteriorating credit among consumers and businesses.
In the quarter, RBC set aside $1.05-billion in provisions for credit losses – the funds banks set aside to cover loans that may default. That was higher than analysts anticipated, and was boosted by an increase in impaired loans, which the bank believes may not be repaid.
RBC said the increase in impaired loans was driven by one large account in the utilities sector. But even excluding the provision for that client, provisions for impaired loans rose 24 per cent from the previous quarter, outpacing the 5-per-cent average increase among its rivals, according to a research note from CIBC analyst Paul Holden.
The bank set aside fewer provisions for performing loans, or risky debt that is still being repaid, as RBC is already factoring in a situation where the economy deteriorates.
“While broad and sustained tariffs could create a recessionary conditions, the range of outcomes are well within the pessimistic scenarios we currently consider,” RBC chief risk officer Graeme Hepworth said during the conference call.
TD set aside $1.21-billion in provisions, which was slightly lower than analysts anticipated but higher than the $1-billion in provisions reserved in the same quarter last year.
CIBC reserved $573-million in provisions, higher than analysts expected but lower than the amount past in the same quarter last year.
TD also provided updates on its strategic review and remediation efforts. In October, TD pleaded guilty to conspiracy to commit money laundering after a lengthy investigation by U.S. regulators and the Department of Justice.
“We are identifying significant opportunities to restructure operations, reduce costs and improve processes,” TD CEO Raymond Chun said during a conference call.
The officials levied several severe penalties and requirements, including an asset cap that restricts the bank’s growth in its U.S. retail division.
By the end of the quarter, TD had reduced its U.S. assets to US$402-billion, down from the US$434-billion limit. That does not include the bank’s deal in February to sell US$9-billion in U.S. residential mortgage loans, as part of its plan to divest from portfolios it considers non-essential to its business.
But it could make further divestments from certain portfolios, including auto loans.
“There’s a lot of progress being made there, but we’re looking at the business mix, we’re looking at simplifying our portfolio, and if it meets those tasks, then we’re not shy to making the decision,” Mr. Tran said.