* Canada bank profits surprisingly strong in Q3
* Loan growth seen drying up
By Cameron French
TORONTO, Sept 1 Gloomier times are ahead for
Canada's resilient banks, which stayed strong through the
financial crisis and beyond and which largely beat analysts'
expectations with their third-quarter results.
The banks impressed investors with strong loan growth and
wealth management revenue in their most recent results
[ID:nN1E78013D]. But analysts expect narrow lending margins and
increased caution by already overstretched borrowers to weigh
on earnings growth in the months ahead.
"The next four quarters will not be as powerful as the last
four quarters for the sector," said CIBC World Markets analyst
Canada's banking sector is dominated by a half dozen big
banks which are both protected from foreign takeovers and
prevented from merging with each other. They generate billions
in profits from their domestic branch-bank businesses and
required no bailouts during the 2008-09 crisis.
Analysts had expected weaker loan growth to start to bite
in the third quarter, which ended on July 31. But it rarely
pays to bet against Canada's banks, and the lenders surprised
with strong performances in their Canadian and U.S. retail
Toronto-Dominion Bank (TD.TO) -- which owns vast branch
networks in both Canada and the United States -- capped off
reporting period for the big banks with a better than expected
profit on Thursday. [ID:nN1E77U1CO]
It earned C$1.72 a share profit, compared with analysts'
estimates of a C$1.62 a share profit, and net profit rose 23
percent to C$1.45 billion ($1.48 billion).
BORROWING TO DRY UP
But Canada's No. 2 lender said earnings growth should
moderate in coming quarters due to slower loan volume growth
and margin pressure. "Obviously there's a lot of uncertainly
given what's going on in the world," said Chief Financial
Officer Colleen Johnston.
Europe's banks are in the grip of a debt crisis, while U.S.
banks are selling assets to build up capital.
Even Canada, which has ridden a strong housing sector to a
relatively even-keel economic performance over the past two
years, experienced an unexpected economic contraction in the
second quarter, data this week showed.
Through it all, Canadians have kept borrowing, enticed by
rock bottom interest rates that have proven a double-edged
sword for the banks.
Profits from strong loan growth is partially offset by the
low rates charged. With central banks in Canada and the United
States both seen holding rates low fore the foreseeable future,
margins are expected to continue to narrow.
And with Canadians carrying record debt, observers say
mortgage and credit card lending growth will likely stall and
business lending may not make up the shortfall.
"Most banks are talking lower levels of loan growth as we
go through the rest of the year," said Juliette John, a
portfolio manager at Bissett Investment Management in Calgary.
The results this quarter have helped drive Canadian
financial stocks up by more than 7 percent since reporting
began, against a 5.8 percent rise for the broader market.
Along with TD, Bank of Montreal (BMO.TO), Bank of Nova
Scotia (BNS.TO), Canadian Imperial Bank of Commerce (CM.TO) and
National Bank of Canada (NA.TO) all topped analysts'
Royal Bank of Canada (RY.TO), the country's biggest lender,
was the only one to miss estimates, as market volatility hit
its proportionally large capital markets division.
That's the weaker trend that many observers had expected to
take hold in the current earnings period.
"I hadn't expected too much (profit) this quarter, so I may
have been one quarter too early," said John Kinsey, a portfolio
manager at Caldwell Securities in Toronto.
(Reporting by Cameron French; editing by Janet Guttsman)