Canadian banks benefit from rebound in consumer spending

As consumers open their wallets, the surge is causing companies to borrow and invest to meet this demand, which has helped increase fees and interest income that banks collect.Christopher Katsarov/The Canadian Press

A pickup in consumer spending and business investment is boosting earnings for three of Canada’s largest banks as customers travel and eat often, and bankers expect growth to continue – perhaps at a more moderate pace – even amid mounting fears of an economic downturn.

Royal Bank of Canada and Toronto-Dominion Bank both reported earnings for the second quarter of the fiscal year ending April 30 that beat expectations, while Imperial Bank of Canada’s profit fell short of expectations as its costs inflated. All three banks saw earnings and loan balances in their retail banking operations and the core Canadian banking business posting solid gains over the previous year.

As consumers open their wallets, a significant increase is causing companies to borrow and invest to meet this demand, which has helped increase fees, fees and interest income that banks collect.

The six Canadian banks will report their results for the second quarter this week. What we know about earnings, profits, and fears of an economic slowdown

But the main question facing banks on Thursday was whether the trend would continue in the face of rising inflation, rapidly rising interest rates, and growing pessimism about prospects for an economic downturn. Investors and analysts are concerned about whether demand for loans could wane and defaults on existing loans could rise if economies teetered into recession.

Banks say their customers remain bullish and that the fundamentals of retail banking look strong enough to withstand some economic headwinds.

“It definitely seems to be some more caution,” said Hrach Panossian, CIBC’s chief risk officer, in an interview. “But at this time, on the ground with our customers, there is still a relatively high level of trust and a relatively high level of activity as the economy opens up, and the service sectors come back.”

On Wednesday, Bank of Nova Scotia and Bank of Montreal reported higher second-quarter earnings and increased loan balances, and executives from both banks offered upbeat forecasts for the financial sector.

Two main factors boost bank confidence: a tight labor market in which Canada’s unemployment rate has fallen to its lowest level in decades, and the financial buffer many customers built during the COVID-19 pandemic in the form of higher savings and lower debt.

With restrictions on public health lifted, spending is back in force. Credit and debit transactions by RBC customers were 30 percent higher in April than they were before the pandemic, CEO Dave McKay said, and that momentum continued into May. TD’s retail credit card sales are up 22 percent year over year, according to Mr. Tran. And at CIBC, purchase volumes on cards were up 30 percent from a year earlier, excluding the bank’s newly acquired portfolio of Costco-branded credit cards.

“We’ve seen, and I will say, a full recovery in the travel, hotel and leisure categories,” Laura Duttori Atanasio, CIBC’s head of personal and small business banking, said on a conference call Thursday.

This spending may come under pressure as inflation and higher interest rates drive up prices and borrowing costs for customers. “It’s certainly going to be eaten up by their discretionary income…and consumers will then need to make choices,” TD Chief Financial Officer Kelvin Tran said in an interview.

“But I think the very important factor is the unemployment rate for the consumer,” Tran said. “If people work for wages and we still see [labour] The market is still very tight, which increases confidence.”

Many clients also have more room for financial breathing in the form of less debt than personal loans, as well as higher savings. At CIBC, lines of credit usage rates are about 20 percent lower than they were in 2019, and the rate of revolving credit card balances is down between 7 and 10 percent.

“We feel really good about consumer health,” said Ms. Dottori-Attanasio. “We’re seeing very prudent behavior when it comes to how people manage their debt and how they pay with their credit cards.”

Although bankers are confident that their clients are resilient, they still struggle to predict how the economy will respond to rapidly rising interest rates. McKay said central banks “should hit demand hard” to curb inflation. “Shall we catch it with a slight slack? I think our message today is that it could go either way, 50-50. Having said that, … there are good shock absorbers to absorb that uncertainty.”

In its fiscal second quarter, RBC earned $4.25 billion, or $2.96 per share, compared to $4 billion, or $2.76 per share, a year earlier. On an adjusted basis, RBC said it earned $2.99 ​​per share, beating an estimate of $2.71, according to Refinitiv.

TD reported net income of $3.8 billion, or $2.07 per share, boosted by a one-time payment of $224 million resulting from the settlement of a lawsuit. TD’s adjusted earnings were $2.02 per share, down slightly from the prior year but ahead of analysts’ consensus forecast of $1.93 per share.

CIBC earned $1.52 billion, or $1.62 per share, compared to $1.65 billion, or $3.55 per share, in the same quarter last year — before the bank completed a two-for-one share split. CIBC said it earned $1.77 per share on an adjusted basis, just below analysts’ estimates of $1.80 per share.

RBC raised its quarterly dividend by 8 cents per share to $1.28, and CIBC increased its dividend by 2.5 cents per share to 83 cents.

RBC and TD have continued to unwind the large loan-loss reserves they have hoarded to protect against the possibility that COVID-19 will amplify losses. RBC recovered $342 million in provisions for credit losses in the quarter. TD set aside only $27 million of total new provisions, while releasing some other reserves as loans were paid off.

Executives at both banks said their credit outlook is more optimistic now that pandemic risks have receded. But each bank has also included more pessimistic assumptions in the models it uses to predict future losses, while acknowledging that the odds of some kind of economic downturn are rising.

“Omicron did not have much effect on [provisions] So that was a positive factor this quarter,” said Mr. Tran. “Then I added something less favourite, which is uncertainty, this outlook.”

Reported by Tim Kiladze

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