Canada's banks have moved out of crisis mode and are shifting their attention to finding new growth in a tough economy.
A stellar first quarter, capped Tuesday by Bank of Nova Scotia's strong results, has senior bankers talking more confidently about hunting for acquisitions and new customers, after a long period of hunkering down.
"We are emerging [from the crisis]in a stronger position than when we went in," Rick Waugh, Scotiabank's chief executive officer, said in a conference call after his bank reported record quarterly revenues and a 17-per-cent jump in profits.
Mr. Waugh suggested that the crisis has had no lasting impact on the bank, but he declined to say how much the bank expects to spend on acquisitions.
"I'm not going to give you the number," he said. "Every investment banker in the world would be listening for it."
The country's six top banks collectively earned about $5.3-billion in the three months ended Jan. 31, up from $3-billion a year ago and $4.7-billion in the prior quarter. Each bank except Royal Bank of Canada topped the expectations of Bay Street analysts, with RBC missing by a very small margin.
The majority of the sector's profits came from Canadian lending; most operations in the U.S. and abroad continued to face significant challenges.
Canadian banks have boosted its profit margins over the past year by charging more for loans, while loan losses have eased because borrowers have repaid their debts more reliably than expected coming out of the recession.
Meanwhile, the amount of money that the Big Six set aside for soured loans fell to $2.1-billion in the latest period from $2.6-billion a year ago and $2.7-billion in the fourth quarter of fiscal 2009.
Indeed, bank executives, who became leery of calling the bottom after the economy descended further than they thought, sound increasingly optimistic.
"I think we've been out of the woods for six months," Bank of Montreal CEO Bill Downe said in an interview Tuesday.
The challenge ahead for the banks will be finding a way to maintain growth at a time when demand for loans from Canadian consumers is expected to wane.
That could be especially troublesome for the banks' mortgage businesses, which have grown swiftly recently thanks to low interest rates, government measures and surprising strength in the housing sector. A number of bankers now expect that higher interest rates and new mortgage approval rules will put a damper on the demand for mortgages in the second half of this year.
At the same time, the unusually high trading revenues that banks have been posting in recent quarters slowed noticeably this time around and are expected to continue falling.
But if the past three years are any indication, the banks will find a way to grow through the headwinds. Analysts are confident that will be the case.
"We are seeing signs of improvement in market and economic conditions and we are taking advantage of opportunities," Royal Bank of Canada chief executive Gordon Nixon said last week.
As a result, banks are not expected to face any large increase in troubled loans. And that will likely allow them to post double-digit earnings per share growth in the coming quarter for the first time since mid-2007, said Genuity Capital Markets analyst Mario Mendonca.
Toronto-Dominion Bank CEO Ed Clark said on a conference call last week that the bank's assumptions for 2010 are "balanced with a decent amount of caution, however there are reasons to be somewhat optimistic about growth in 2010 even though it is a transition year."
TD is seeing increased evidence that loan-loss rates have peaked in its Canadian consumer lending business, and earnings should get a further boost in 2011 as those losses decline while interest rates rise, he said.