Canadian banks are benefiting from the rebound in consumer spending

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As consumers open their wallets, the surge is pushing businesses to borrow and invest to meet that demand, which has helped push up fees and interest income collected by banks.Christopher Katsarov/The Canadian Press

The recovery in consumer spending and business investment is pushing profits at three of Canada’s biggest banks higher as customers travel and dine out more often, and bankers expect growth to continue – may -to be at a more moderate pace – even amid growing fears of an economic slowdown.

Royal Bank of Canada and Toronto-Dominion Bank both reported profits for the second fiscal quarter ended April 30 that beat estimates, while Canadian Imperial Bank of Commerce’s earnings fell short of expectations as its costs were rising. All three banks saw revenue and loan balances in their core Canadian retail and business banking businesses post strong increases from a year earlier.

As consumers open their wallets, the surge is pushing businesses to borrow and invest to meet that demand, which has helped push up fees and interest income collected by banks.

The six major Canadian banks are releasing their second quarter results this week. What we know about earnings, dividends and concerns about the economic downturn

But a key question facing banks on Thursday was whether the trend would continue in the face of high inflation, rapidly rising interest rates and growing gloom over the prospects of an economic slowdown. Investors and analysts are unsure if demand for loans could decline and defaults on existing loans could increase if economies head into a recession.

Banks say their customers are still optimistic and that the fundamentals underpinning retail banking appear strong enough to weather some economic headwinds.

“It definitely looks like there’s more caution,” Hratch Panossian, CIBC’s chief risk officer, said in an interview. “But at this point, on the ground with our customers, there’s still a relatively high level of confidence and a relatively high level of activity because the economy has opened up, the service sectors are coming back.”

On Wednesday, the Bank of Nova Scotia and Bank of Montreal both reported higher second-quarter profits and rising loan balances, and executives from both banks offered an optimistic outlook for the financial sector.

Two key factors are bolstering banks’ confidence: a tight labor market, where Canada’s unemployment rate is at its lowest level in decades, and the financial cushion that many customers have built up during the COVID-19 pandemic under the form of higher savings and lower debt.

As public health restrictions have been lifted, spending has skyrocketed. RBC client credit and debit transactions were 30% higher in April than before the pandemic, and that momentum continued through May, Chief Executive Dave McKay said. Retail sales of TD credit cards are up 22% year over year, according to Tran. And at CIBC, card purchase volumes were up 30% year over year, excluding the bank’s newly acquired Costco-branded credit card portfolio.

“We have seen, I will say, a full recovery in the categories of travel, hospitality and entertainment,” said Laura Dottori-Attanasio, head of personal and small business banking at CIBC, during a conference call on Thursday.

These expenses could come under pressure as inflation and rising interest rates push up prices and borrowing costs for customers. “It’s definitely going to eat into their discretionary income…and then consumers will have to make choices,” TD chief financial officer Kelvin Tran said in an interview.

“But I think for the consumer what’s a very important factor is the unemployment rate,” Tran said. “If people have paid jobs and we continue to see the [labour] the market remains very tense, this reinforces confidence.

Many customers also have more financial flexibility in the form of reduced personal loan debt, as well as higher savings. At CIBC, line of credit utilization rates are about 20% lower than 2019, and revolving credit card balance rates are down 7-10%.

“We feel really good about consumer health,” Ms. Dottori-Attanasio said. “We’re seeing very cautious behavior in terms of how people manage their debt and how they make payments on their credit cards.”

Although bankers are convinced that their clients are resilient, they still struggle to predict how the economy will react to rapidly rising interest rates. Central bankers “have to hit demand really hard” to rein in inflation, McKay said. “Are we going to land it with a mild recession? I think our message today is that it could go either way, it’s 50-50. That said, … there are good buffers to absorb this uncertainty.

In the second fiscal quarter, RBC earned $4.25 billion, or $2.96 per share, compared with $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, helped by a one-time increase of $224 million from a lawsuit settlement. TD’s adjusted earnings were $2.02 per share, down slightly from a year earlier but ahead of the analyst consensus forecast of $1.93 per share.

And 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 is proceeding with a 2-for-1 stock split. CIBC said it earned $1.77 per share on an adjusted basis, just below analyst estimates of $1.80 per share.

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

RBC and TD continued to unwind large loan loss reserves they had accumulated to hedge against the possibility of COVID-19 inflating losses. RBC recovered $342 million in provisions for credit losses during the quarter. TD has only allocated $27 million in new provisions in total, while releasing other reserves as the loans are repaid.

Executives from both banks said their credit expectations were more optimistic now that pandemic-related risks have receded. But each bank has also incorporated more pessimistic assumptions into the models it uses to predict future losses, acknowledging that the chances of some sort of economic downturn are increasing.

“Omicron did not have a big impact on [provisions] so that was a favorable factor in this quarter,” Mr. Tran said. “And then you added something that’s less favorable, which is this uncertainty, this perspective.”

With reporting by Tim Kiladze

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