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Gains abroad extend the record earnings streak at Canadian banks

Gains abroad extend the record earnings streak at Canadian banks
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Canada’s eight big banks extended their record earnings streak this year, posting a 7.5 per cent jump in annual profit fuelled by operations outside their home turf.

Net income for the companies totalled C$45.9 billion ($34.3 billion U.S.) in the fiscal year ended Oct. 31. Toronto-Dominion Bank and Bank of Montreal profited from their U.S. consumer-lending divisions, while Bank of Nova Scotia’s Latin America focus helped in a year when Canadian companies saw more muted results in domestic banking. Royal Bank of Canada’s wealth management was boosted by its Los Angeles-based City National Bank, and Canadian Imperial Bank of Commerce benefited from its takeover of PrivateBank in Chicago last year.

“The strongest growth from the sector this year came from the banks’ U.S. and international franchises,” Scotiabank analyst Sumit Malhotra said in an interview. “We believe that will continue to be the differentiator if the Canadian backdrop decelerates as a result of lower oil prices or continued slowing in residential real estate.”

Canadian banks will lift adjusted per-share operating earnings by 6 per cent in 2019, compared with the 13 per cent increase this year, according to Malhotra. This year marked the eighth consecutive record for adjusted profit, and return on equity for the eight banks reached 16.5 per cent, the highest level since 2014.

Yet investors aren’t reaping the rewards. Canada’s eight-company S&P/TSX Commercial Banks Index has fallen 7.8 per cent this year, similar to the decline of the broader Canadian benchmark, and is on pace for its worst year since its 8.1 per cent plunge in 2015.

“People maybe are just a little bit skeptical — it has been so good for so long for the banks,” John Kinsey, a portfolio manager with Caldwell Securities Ltd., said in a Nov. 30 interview. Canadian bank stocks are under pressure from a number of “lurking” factors, including mortgage concerns and a downturn in Canada’s oilpatch.

Slumping oil and gas prices hit Canada particularly hard because the energy industry accounts for about 10 per cent of Canada’s economy and a fifth of exports. Also of concern is the ability of Canadians to weather higher interest rates after years of low borrowing costs that elevated household debt and drove up housing prices in Vancouver and Toronto. Such factors may weigh on an economy that’s forecast to grow 2.1 per cent next year, lagging behind an expected 2.6 per cent expansion in the U.S.

Even with Canadian bank stocks down, Kinsey said he sees good value in the shares, which carry an average dividend yield of about 4.1 per cent.

“It’s a conservative, safe place to put money with a reasonable return,” he said.

Better Than U.S.

While the Canadian bank index has outperformed the 11 per cent decline of the KBW Bank Index, comprised of 24 U.S. lenders, this year’s performance pales to the 11 per cent gain in 2017 and 25 per cent surge in 2016.

“The two magic words that have weighed significantly on bank stocks in recent months have been ‘late cycle,’” Scotiabank’s Malhotra said. “While there isn’t much evidence that we are on the verge of a credit downturn, it has been nine full years since the last real credit cycle, and that is raising concern that the benign backdrop is nearing a conclusion.”

The market reaction isn’t fazing bank executives.

“It’s a sector that has generally been under pressure,” CIBC chief financial officer Kevin Glass said in a Nov. 29 phone interview, after the Toronto-based lender reported a 12 per cent jump in annual net income. “We’ve performed reasonably well this year.”

Toronto-Dominion CFO Riaz Ahmed chalked up the industry’s share decline to market sentiments and conditions.

“Generally there’s been a sell-off right across the board in the last few weeks, and we’ve seen a bit of volatility,” Ahmed said in a Nov. 29 phone interview. “What’s important for us is to continue to focus on growing the franchise and delivering very good returns.”
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