Canada’s big banks feel the pain from the stock market’s swoon
Investors weren’t the only ones who took a hit when North American stock markets swooned in late 2018: It seems Canada’s biggest banks felt the pain, too.
On Thursday, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank became the latest banks to note their financial results for the most recent quarter were negatively affected by the market turbulence.
In particular, the volatility hurt revenue from the sale of bonds and shares, and also dampened some trading activity.
The other members of the Big Five had also cited some form of market disruption in announcing their first-quarter results. Royal Bank of Canada’s CEO said in a release that there was “a challenging market backdrop,” while Bank of Nova Scotia’s said that “significant market volatility impacted some of our business lines.” Bank of Montreal’s CEO said in a release that “market-sensitive businesses were impacted by the challenging revenue environment.”
CIBC reported earnings Thursday of nearly $1.2 billion for the three months ended Jan. 31, down 11 per cent from a year ago. Adjusted earnings per share were $3.01, below analyst expectations.
“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,” said Victor Dodig, president and chief executive officer of CIBC, during a conference call Thursday morning.
TD, meanwhile, said its first-quarter profit was $2.4 billion, up two per cent compared with the same three months last year. Adjusted earnings per share were $1.57, which also missed analyst estimates.
“TD’s retail segments in both Canada and the U.S. had a strong start to the year, with continued revenue growth and solid earnings,” said TD president and CEO Bharat Masrani in a release. “However, market volatility and lower client activity impacted our wholesale segment in the quarter.”
National Bank Financial analyst Gabriel Dechaine wrote that CIBC’s earnings miss was driven by “higher than expected” provisioning for credit losses, while TD’s was “primarily attributable” to lower trading and advisory revenues, in addition to greater provisions for credit losses.
CIBC said its results were affected by a few items, such as $227 million to secure its place in Air Canada’s new loyalty program. It also said there was lower transaction volume in its Canadian wealth-management business, as well as less underwriting of debt and equity and lower investment portfolio gains from its capital-markets unit.
“There was slower client activity, obviously, given the heightened volatility in … the equity and debt capital markets, and also in our bond-trading business,” said Harry Culham, the head of the bank’s capital-markets business, during the conference call. “But we’re very pleased with the diversification of our revenue across products, industry and geography, and we’re pretty confident this is going to continue forward.”
Like CIBC, TD reported a charge tied to a loyalty agreement with Air Canada, which was $607 million.
But TD’s wholesale business makes money from “corporate lending, advisory, underwriting, sales, trading and research, client securitization, trade finance, cash management, prime services, and trade execution services,” it says. The unit saw revenue fall $308 million for the quarter, to $582 million, and reported a loss of $17 million.
“The volatility in rates, equity and credit markets resulted in a difficult trading environment, reduced client activity and a meaningful slowdown in debt and equity underwriting, particularly in Canada,” the bank said.
TD runs a “lower-risk” securities dealer that is focused on fixed income, according to Riaz Ahmed, the bank’s chief financial officer.
While the bank did not have any significant losses or write-downs on any given day, Ahmed said there were two effects from the volatility last year, which had been attributed to various concerns, including those around interest rates and global trade.
“One is clients did remain on the sidelines,” Ahmed told the Financial Post in a phone interview. “That is, with so much volatility and uncertainty, they might have deferred and waited to make their decisions about their issuances or whatever. And on the other hand, because of the dislocations in the market, our trading margins compressed quite significantly.”
Still, CIBC announced Thursday that it was hiking its quarterly dividend by four cents, to $1.40 per share. TD said it was increasing its dividend as well, by seven cents, to 74 cents per share.