Three Canadian banks fall short of analyst expectations

Earnings from three of Canada’s biggest banks improved in the second quarter but fell short of predictions, with Royal Bank, TD Bank and CIBC all taking hits from a variety of factors.

TORONTO — Earnings from three of Canada’s biggest banks improved in the second quarter but fell short of predictions, with Royal Bank, TD Bank and CIBC all taking hits from a variety of factors.

But while analysts described the results as disappointing, some were quick to point out it was a case of expectations elevated to a level that was hard to live up to.

Part of the blame was placed on Bank of Montreal (TSX:BMO), which soared above analyst expectations when it was the first big Canadian bank to report second-quarter earnings on Tuesday.

Put simply, BMO wound up being a hard act to follow.

“BMO set it up nicely, because they came with better-than-expected results… there was no concentration with where the outperformance was, it was just kind of everywhere,” said Brad Smith, senior financial services analyst at Stonecap Securities.

Once the other bank results began pouring in Wednesday, they appeared less impressive by contrast.

Royal Bank (TSX:RY) was widely considered one of the biggest disappointments, even though it posted a $1.3-billion profit, vastly improved from a $50-million loss a year ago when it recorded a $1-billion impairment of goodwill.

Cash earnings per share was 96 cents per share, below analyst expectations of $1.08 according to Thomson Reuters.

Royal blamed the stronger Canadian dollar which it said hurt both its profit and revenue in the quarter. The squeeze was felt particularly in its capital markets and wealth management which both operate with other currencies.

The loonie was around parity for most of the quarter and chipped away at the value of earnings from foreign holdings of the big banks, which have been growing in recent years.

“While the miss against expectations was obviously an issue, we believe that the earnings volatility exhibited in the quarter compounded the effect given Royal’s relative premium valuation,” Barclays analyst John Aiken wrote in a note to clients.

“We are concerned that Royal Bank may face additional valuation weakness as consensus numbers are likely brought down.”

Royal Bank shares closed the trading session as the biggest decliner of the banks that reported, down $2.62 to $56.85 on the Toronto Stock Exchange.

Meanwhile, CIBC (TSX:CM) reported a profit of $660 million, rising from a $51-million loss a year earlier when the Canadian banking sector was feeling the impact of a global credit crisis.

Core cash earnings per share was $1.46, compared to analysts estimates of $1.50 per share. CIBC’s provisions for credit losses fell to the lowest level since the second quarter of 2009.

“Specific provisions in our consumer portfolios were down $29 million from the first quarter, driven by lower losses in (credit) cards and personal banking,” CIBC president and CEO Gerry McCaughey said on a conference call with analysts.

CIBC shares ended the trading day $3.27 lower to $72.02 on the TSX.

TD Bank (TSX:TD) broke stride with the other banks in some respects, as it more than doubled its second-quarter profit and reported a solid gain in its capital markets revenues.

The bank posted nearly $1.2 billion in net income, or adjusted earnings per share of $1.36 — two cents short of what analysts had on average been expecting.

TD’s wealth management division profits lifted 42 per cent to C$111 million on higher fee revenues and stronger trading volumes.