Canadian banks are reaping the benefits of their recent U.S. expansion as strong performance south of the border is helping them weather a sluggish economy at home.
Over the past week several of Canada's biggest names in banking – such as TD Bank Group and BMO Financial Group, both in Toronto – have reported double-digit growth in profits in their U.S. units. Results in their core markets, however, have been meager.
There are a number of reasons why. A flurry of U.S. dealmaking after the crisis has been a boon for the Canadian banking giants. And while the U.S. economy is mostly on the upswing, conditions in Canada have begun to drag amid fears of a housing bust and the ongoing fallout from low energy prices, analysts said.
One thing is clear for U.S. banks: Expect more competition from your Canadian neighbors, as they continue to scout out deals in search of growth on your home turf.
Canadian banks been able "to garner good momentum out of those [U.S. acquisitions], at a time when domestic operations are slowing down," said Sohrab Movahedi, an analyst with BMO Capital Markets.
For the period ending July 31, TD Bank's U.S. retail profits grew 12% from a year earlier, to $609 million. Meanwhile, retail profits in Canada dipped 2%.
TD, of course, has scooped up U.S. assets over the past few years, including a Nordstrom credit card portfolio last year and the $11.6 billion-asset South Financial Group in Greenville, S.C., in 2010.
BMO – which recently bought a transportation finance book from GE Capital – reported a 21% jump in U.S. retail earnings to $212 million. By comparison its Canadian retail earnings edged up only 1%.
BMO expanded rapidly in the Midwest during the crisis, including through its 2011 acquisition of the $45 billion-asset Marshall & Ilsley.
"Canadian bank executive teams are clearly recognizing that growth in Canada is going to be constrained for a long time," said Meny Grauman, an analyst with Cormark Securities. "It's the U.S. where they're going to be looking for growth."
The results coincide with grim forecasts for growth in Canada – and as worries about a potential housing bubble intensify.
Home prices in major cities, such as Vancouver and Toronto, have spiked over the past few years. During earnings calls, bankers pinned the boom on a mix of factors: immigration, a shortage of single-family homes, and an influx of foreign investment.
Average home prices have increased more than 30% from a year ago, to about $1 million, according to the Real Estate Board of Greater Vancouver.
The situation is a reversal in fortunes of sorts for the two neighboring countries. Canadian consumers did not feel the brunt of the financial crisis that swept the United States nearly a decade ago and, as a result, have continued to take on record levels of debt.
"Consumers have been gorging on mortgage debt for so long," Grauman said.
Bankers warned about record levels of household debt this week during quarterly investor calls.
The Canadian government has begun to intervene. The provincial government in British Columbia, for instance, recently implemented a tax on foreign buyers who purchase property in the Vancouver region.
"The run-up in prices is getting everyone worried, and the only people who aren't worried are the real estate agents," Grauman said.
Still, even though bankers expressed concern over the past week about a potential bubble, credit quality remains strong, analysts said.
Given the looming concerns about the Canadian economy, a number of big banks have begun to look for opportunities across the border.
"I think the broad feeling is that the economic outlooks is brighter in the U.S. than in Canada," Movahedi said, noting that some have exercised "prudence" and slowed their growth in fast-growing Canadian markets. During quarterly calls over the past week, executives from TD and Royal Bank of Canada said they have begun to cede market share in major cities where the housing market is booming.
TD also said it has recently strengthened its underwriting standards.
"From what we can tell, we're under-indexed to the growth in [Vancouver] right now," said Dave McKay, president and chief executive of the Royal Bank of Canada.
But Canadian banks see more favorable conditions across the border. A number of big banks have announced U.S. bank deals in the past year, looking to expand their commercial lending and wealth management businesses.
Canadian Imperial Bank of Commerce said in June that it would buy the $18 billion-asset Private Bancorp in Chicago. Additionally, RBC last year purchased the $40 billion-asset City National in Los Angeles – a deal that has boosted overall profits.
TD also said on its call that it continues to look for bank deals across the Southeastern United States, as well as "tuck-in" acquisitions that become available.
"For the foreseeable future, I see our growth being good in the U.S.," said Mike Pedersen, head of U.S. banking at TD.