TORONTO -- Canada's biggest banks in the latest quarter grappled with a plunge in North American equity markets and deteriorating credit quality, hampering their earnings, but benefited from strength in their international businesses.
Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce, the last of the country's large lenders to report financial first-quarter results, fell short of expectations amid weak market-related earnings. TD's wholesale banking unit recorded a $17 million net loss during the period as CIBC's capital markets division saw a 38 per cent year-over-year earnings decline.
All Big Five banks were hampered by the "challenging" market backdrop during the quarter, particularly in December, which stemmed from a variety of concerns including the U.S.-China trade skirmish and Brexit that kept investors on the sidelines.
"Capital markets' earnings certainly took a hit," said Robert Colangelo, the senior vice-president of financial institutions at ratings agency DBRS.
"I think this is first time I've seen TD with a loss in that segment... But overall, obviously, the markets were very challenging, and showed in the declines that we saw."
CIBC on Thursday reported $1.18 billion in net income for the quarter ended Jan. 31, down 11 per cent from the same period a year earlier while TD reported a 2.4 per cent uptick in financial first-quarter profits.
The Bank of Montreal's earnings during the quarter were up eight per cent from a year ago, blowing past market expectations, while Royal Bank of Canada's profits were in line, up roughly five per cent from a year ago. Quarterly profits at the Bank of Nova Scotia, however, slipped by four per cent and missed analyst expectations.
Despite "challenging market conditions," Canada's five largest lenders delivered a collective $10.5 billion in profit during the three-month period.
"While we were met with some challenges this quarter, including a volatile market and isolated loan impairments, our core business continued to perform very well and in line with our strategy," CIBC chief executive Victor Dodig told a call with financial analysts.
"Our investments in strong client relationships, our ongoing earnings diversification and our improving operational efficiency are paying off, providing resilience to our earnings through occasional headwinds."
Another factor putting downward pressure on the banks' earnings was eroding credit quality, with the exception of BMO, said James Shanahan, an analyst with Edward Jones based in St. Louis.
A surge in provisions for credit losses, or money set aside for loans that could go bad, also held back bank earnings. CIBC saw the largest uptick, with PCLs of $338 million, up 121 per cent.
"The other four big banks generally reported not only a sharp increase in credit-related costs, but also impaired loans," he said.
CIBC, TD and RBC all noted losses on an impaired loan -- a loan that is unlikely to be repaid in full -- in the utility sector.
The account was not named, but was believed to be Pacific Gas and Electric in California, or PG&E, said Shanahan.
PG&E recently filed for bankruptcy as the U.S. utility faces billions of dollars in potential damages stemming from wildfires in California. Its equipment has been blamed for starting some of the destructive blazes in recent years.
"Certainly there were company-specific issues in the utility sector, but then broadly speaking, there was some deterioration in retail portfolios," Shanahan added.
Meanwhile, RBC, Scotiabank, CIBC, TD all hiked their quarterly dividend -- an indication of some confidence in their future prospects.
TD's chief executive Bharat Masrani said that while TD Securities had a "rough quarter," market conditions are improving and the bank is expecting earnings-per-share growth this year to be at the low end of its seven to 10 per cent medium-term target range.
"Obviously, if market conditions change dramatically then we'll have to rethink the number," Masrani told analysts on a conference call. "But let's not forget, that not withstanding a small loss in wholesale, the bank EPS is one per cent up, year over year. That tells you the earning power of our overall franchise, and the diversification we have."
As in past quarters, the banks' ongoing strategy to expand their global footprint helped to drive profits.
CIBC, RBC, TD and BMO all got an earnings bump from their U.S. businesses, while Scotiabank saw a strong contribution from its international operations, which has been focused on the Pacific Alliance countries of Mexico, Chile, Colombia and Peru.
"Businesses outside of Canada are performing quite strong," said Colangelo. "We've seen double-digit loan growth across those businesses, and so that is providing some sort of offset to what would be considered slowing growth in Canada, in particular with respect to residential mortgages and consumer lending."
