Positive outlook for big banks

TORONTO — Canada’s big banks were basking Wednesday in the afterglow of a strong third-quarter performance that came amid a worldwide financial crisis in which scores of other financial institutions around the world crashed and burned.

TORONTO — Canada’s big banks were basking Wednesday in the afterglow of a strong third-quarter performance that came amid a worldwide financial crisis in which scores of other financial institutions around the world crashed and burned.

At a financial forum in Toronto, senior executives trumpeted the gains banks made while looking forward to some of the opportunities the global meltdown has opened up for them, particularly outside Canada.

Royal Bank CEO Gordon Nixon said he saw “significant opportunities” for acquisitions in the next few years amid further restructuring in the financial-services sector, but said the bank would proceed with caution.

His comments were echoed by Scotiabank CEO Richard Waugh, who said Jamaica, Mexico and Chile all offered up chances for expansion, while Bank of Montreal CEO Bill Downe said he saw the possibility of buying troubled consumer banks in the U.S., especially in the midwest.

“I’m highly confident that there will be good deposit bases that can be acquired and high-quality branches,” Downe told the Scotia Capital forum, adding he expected U.S. authorities to ramp up bank closures over the next year.

“What we’ve done is invested heavily in understanding where in the market there are banks that could be good opportunities.”

A Scotia Capital research report Wednesday noted Canadian banks had reported “stellar third-quarter earnings, better than street estimates,” and the third straight quarter of outperforming expectations.

Last month for example, Royal, the country’s largest bank, reported record quarterly profit of $1.56 billion.

Altogether, the five biggest banks — the Royal, CIBC, TD, Scotiabank and Bank of Montreal — earned a combined total of $4.4 billion in third quarter profits for the three months ended July 31. That was $500 million higher than the $3.9 billion a year earlier.

That was 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.

The Scotia Capital report attributed the positive news to strong wholesale-banking earnings and trading revenue.

“Canadian banks seem to have weathered the siege in a strong fashion,” the report states.

“The most significant development this quarter, we believe, was the improvement in the net interest margin, which reversed an eight-year descent.”

Bank stocks have risen 50 per cent year-to-date, substantially outperforming the Toronto Stock Exchange, while dividend yields have been a healthy 4.1 per cent with prospects of further increases in the coming quarters.

CIBC CEO Gerry McCaughey said his bank’s strong capital levels would be used for its retail-business expansion rather than be used to reward investors.

While the bank had lower-than-expected quarterly profit in August because of funds set aside to cover bad loans, it did report a 12 per cent Tier 1 capital ratio — above the levels held by international competitors.

“Our Tier 1 (capital ration) is at the high end of what we think is required given the current environment,” McCaughey said.

“But unless we have a good usage for it from the viewpoint of normal business growth, we would not be engaging in activities such as dividend increases or share buybacks in order to bring the Tier 1 down.”

Nixon said markets were showing signs of recovery and the economic tailspin was slowing. The bank’s credit profile showed improvement even in the hard hit United States, although economies around the world still faced “many challenges.”

During the forum, environmental activists asked whether Nixon was comfortable with his bank’s financing of development of the Alberta oilsands, which they view as destructive and unhealthy.

Nixon said his bank tries to take a “balanced” approach and that all financial institutions invest in the energy sector.

On the TSX Wednesday, Royal Bank (TSX:RY) shares closed up 32 cents at $57.27, while CIBC (TSX:CM) shares fell seven cents to $65.38. Scotiabank (TSX:BNS) stock was up 10 cents to $48.60, BMO (TSX:BMO) stock was up 30 cents at $53.15 and TD Bank (TSX:TD) shares were up 23 cents to $68.25.

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