TD, CIBC beat expectations with surge in capital markets

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Toronto-Dominion Bank and Canadian Imperial Bank of Commerce reported fiscal third-quarter results that topped analysts’ estimates as soaring capital markets earnings softened the economic impact of the coronavirus pandemic.

Both Toronto-based lenders benefited from a surge in trading and higher investment-banking fees in the three months through July, joining Royal Bank of Canada, Bank of Nova Scotia and Bank of Montreal in reporting record profit from their capital markets divisions in the quarter.

At Toronto-Dominion’s TD Securities division, earnings jumped 81% to C$442 million ($336 million), with trading income and underwriting and advisory fees almost doubling from a year earlier.

“Client activity in both Canada and the U.S. has been particularly strong, and that, taken together with very active markets, has really driven additional flows into the business,” Toronto-Dominion Chief Financial Officer Riaz Ahmed said in a phone interview Thursday. “We’ve seen not only record levels of debt underwriting, but we also had good performance in equity underwriting and particularly in fixed-income markets.”

CIBC saw earnings surge 67% to C$392 million at its capital markets division, fueled by higher trading and fees from dealmaking.

The capital markets divisions were the bright spot for all Canadian lenders in a quarter marked by elevated loan-loss provisions that eroded overall profit, and lower earnings in their mainstay personal-and-commercial banking businesses. Toronto-Dominion and CIBC, the last of the country’s Big Six banks to report quarterly results, were no different.

Toronto-Dominion, Canada’s second-largest lender by assets, earmarked C$2.19 billion for souring loans in the quarter to brace for the economic impacts of the pandemic, the biggest loan-loss provisions among the banks for the three months, though down from a record C$3.22 billion set aside in the second quarter.

“We have long known that TD has a greater exposure to Covid-sensitive loans and unsecured consumer credit, but we thought its reserve coverage and capital base were relatively ‘fine’ last quarter,” RBC Capital Markets analyst Darko Mihelic said in a note to clients Thursday. “TD’s history and culture are based on conservatism, and therefore we think investors will likely view TD’s reserves and capital levels as being at ‘fortress’ levels, but a seed of doubt has been sown.”

CIBC, the country’s fifth-largest lender, set aside C$525 million in the quarter, less than the record C$1.41 billion in provisions in the second quarter though still up 80% from a year earlier.

“We feel at this point we are appropriately and adequately provisioned for the outlook that we currently expect and so, subject to any changes to the environment, we feel a lot of the credit provisioning is behind us,” CIBC CFO Hratch Panossian said in an interview.

At Toronto-Dominion, Canadian personal and commercial banking business, which typically accounts for almost half the bank’s overall earnings, earned C$721 million, about half the total a year earlier. The U.S. retail business saw a 48% earnings drop to C$673 million. Higher provisions from a year earlier and tighter net interest margins hurt results for both divisions.

Toronto-Dominion has been facing shrinking net interest margins as central banks cut rates to shore up economies amid the pandemic. Overall margins were 1.73% in the quarter, compared with 1.91% in the prior three months and 1.93% a year earlier, and marking the lowest in at least 18 years. Net income fell 31% to C$2.25 billion, or C$1.21 a share, with adjusted per-share earnings of C$1.25 beating the C$1.23 average estimate of 11 analysts in a Bloomberg survey.

CIBC’s Canadian personal and small-business banking, its biggest business, saw a 23% drop in earnings to C$508 million on lower revenue due to the pandemic’s economic impacts. A bright spot, though, was mortgages, with balances rising 3% to C$207 billion following two years of underperformance.

The company has a commercial-banking and wealth-management presence on both sides of the Canada-U.S. border. At the U.S. business, earnings declined 64% to C$62 million, while at the domestic division they fell 7% to C$320 million. Net income dropped 16% to C$1.17 million, or C$2.55 a share, with adjusted per-share earnings of C$2.71 topping the C$2.18 average estimate of 12 analysts.

Bloomberg News
Earnings Capital markets TD Bank CIBC Canada
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