Earnings beat expectations

Banks have played the unenviable role of culprit in the current global recession, taking a fair share of the blame for the subprime mortgage crisis in the U.S. and the subsequent financial meltdown that produced billions of dollars in losses. But you wouldn’t know it in Canada.

TORONTO — Banks have played the unenviable role of culprit in the current global recession, taking a fair share of the blame for the subprime mortgage crisis in the U.S. and the subsequent financial meltdown that produced billions of dollars in losses. But you wouldn’t know it in Canada.

Canada’s so-called Big Five banks earned a combined total of $4.4 billion in third quarter profits, up by $500 million from $3.9 billion a year earlier. Scotiabank, the last of the big banks to release financial results this week, said Friday it earned $931 million for the fiscal third quarter ended July 31.

That was lower than last year’s $1 billion profit but well above analyst expectations and showed the Canadian banks, despite higher loans losses and problems in some of their businesses, have weathered the recession better than most.

Compared to the U.S., where the financial crisis has seen 81 banks fail in 2009 alone, the Canadian banking system is quickly establishing itself as one of the safest in the world, and this quarter only served to cement that reputation.

Once criticized for making huge profits and squeezing consumer and corporate borrowers, the Canadian industry is now being viewed by many Canadians as prudent, solid foundations of the economy which avoided the recklessness that battered big Wall Street financial companies such as Lehman Brothers , Bear Stearns and AIG.

“I don’t know that their reputation needed any more help than it’s already gotten over the past two years, given how the Canadian banks have performed relative to banking systems around the world,” said Craig Fehr, bank analyst at Edward Jones in St. Louis.

Although Canadian banks have by no means been insulated from the credit crisis that has rocked institutions in the U.S. and elsewhere, the fact that they’ve managed to improve their profits in the midst of a global financial crisis has lifted their share prices, with the TSX financial sector gaining four per cent this week.

With the exception of Canadian Imperial Bank of Commerce (TSX:CM), all the major banks roundly beat analyst expectations for the quarter ended July 31.

“I would categorize the key theme to this quarter as being better-than-expected credit performance for the group as a whole,” Fehr said.

Two of the five banks — TD Bank Financial Group (TSX:TD) and BMO Financial Group (TSX:BMO) — said they put aside less money to cover bad loans this quarter compared to a year earlier.

Analysts had expected significant loan losses due in large part to the declining value of U.S. commercial real estate. Although CIBC, Bank of Nova Scotia (TSX:BNS) and Royal Bank (TSX:RY) reported higher provisions for credit losses, investors expected the banks’ overall credit performance to be much worse.

In additions, loan loss provisions were offset in large part by the Bank of Canada lowering its key overnight rate to 0.25 per cent, which has allowed the banks to rake in a higher net interest margin, Booth said.

However, this doesn’t mean Canada’s big banks are in the clear when it comes to credit losses, Fehr said.

“I don’t think that we’ve seen the peak and it’s all roses from here on out in terms of credit provisions,” he said.

“We’re going to continue to see loan losses be a headwind to earnings for several quarters going forward.”

CIBC, which has the biggest retail division of the five major banks, was also the only bank to disappoint analysts with its earnings this quarter.

CIBC said it set aside $547 million in provisions for loan losses in the quarter, up significantly from $203 million a year earlier.

Loan losses were most pronounced in the retail banking sector, which includes credit cards and personal loans, where weak economic conditions led to a spike in bankruptcies and delinquencies. CIBC Retail Markets recorded loan losses of $423 million, while net income totalled $416 million.

Fehr said credit cards will continue to “crank out higher provisions” as higher unemployment rates take their toll on personal finances, and commercial loan deterioration could continue to be a problem as well.

However, as long as interest rates stay low, the banks will continue to do well, especially if loan losses continue to moderate in the meantime, said .

“The banks could make a ton of money over the next six months if that sort of scenario unfolds,” said Laurence Booth, a finance professor at the University of Toronto’s Rotman School of Management.

“Before the Bank of Canada starts letting the overnight rate rise, you could see the banks’ profits increasing dramatically.”

All five major banks reported this week. BMO’s adjusted earnings per share beat analyst expectations by 11 per cent, while TD topped expectations by 20 per cent, Royal beat expectations by 33 per cent and Scotiabank exceeded predictions by four per cent. CIBC was the only major bank to disappoint investors, missing expectations by two per cent.

Just Posted

PHOTO: Rainbow Block Party at Red Deer’s West Park

The Trans and Non-Binary Aid Society hosted a Rainbow Block Party at… Continue reading

Blood donations needed in Central Alberta: Canadian Blood Services

357 donors are needed before Aug. 26 at the Red Deer clinic

Warkentin seeks UCP nomination

Another nominee for Red Deer North

WATCH: Annual Family Picnic at Central Spray and Play

Blue Grass Sod Farms Ltd. held the Annual Family Picnic at the… Continue reading

Photos: Smoky conditions in Red Deer

Red Deer and area is experiencing high risk air quality.See related: Red… Continue reading

Committee to decide how millions in Humboldt Broncos donations are split

SASKATOON — Lawyers for the families of some of those who died… Continue reading

Boy, 11, dies after being struck by payloader on southern Alberta ranch

BOW ISLAND, Alta. — A boy has died after an accident on… Continue reading

Liberals look at creating federal holiday to mark legacy of residential schools

OTTAWA — The federal Liberal government wants to establish a holiday to… Continue reading

Thousands of police officers expected at regimental funeral in Fredericton

FREDERICTON — Thousands of police officers and first responders from across the… Continue reading

B.C. declares state of emergency over wildfires

VICTORIA — The British Columbia government has declared a provincial state of… Continue reading

As service refusals make headlines, experts say businesses usually in the wrong

Two Canadian businesses that recently made headlines for refusing customers have learned… Continue reading

Irregular asylum claims increased in July after two months of decline

OTTAWA — The number of irregular border crossers in Canada went up… Continue reading

Most Read


Five-day delivery plus unlimited digital access for $185 for 260 issues (must live in delivery area to qualify) Unlimited Digital Access 99 cents for the first four weeks and then only $15 per month Five-day delivery plus unlimited digital access for $15 a month