Despite combined write-downs in excess of C$2 billion
relating to US subprime mortgage investments, Canada’s Big Six
banks have reported record net income in excess of C$20 billion for
the year. The biggest winner was the country’s third-largest
financial group by assets, Toronto-Dominion, writes Douglas
Blakey.
Shockwaves from the credit crunch originating over the border in
the US are reflected in the full-year results of Canada’s Big Six
banks, with annual earnings varying according to exposure to US
subprime and collateralised debt.
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The biggest gainer was the third-largest bank, Toronto-Dominion
(TD), which in 2007 focused on Canadian and US retail banking and
wealth management markets. It reported a 44 percent rise in
fourth-quarter profits and a 24 percent increase in net income for
fiscal year 2007 after avoiding the subprime related writedowns
suffered by its peers.
“In a year of turbulent markets, clearly the successful altering of
our risk-reward profile was a significant advantage for us,” CEO
Edmund Clark said in a statement.
Scotiabank, the country’s second-largest bank, was able to report
that it met all of its financial objectives for 2007, boosted in
large part by its policy of staying away from the US market. Its
writedown of C$133 million ($133 million) on structured credit
instruments contrasts sharply with credit losses reported by rivals
BMO Bank of Montreal (BMO) and Canadian Imperial Bank of Commerce
(CIBC).
BMO failed to achieve most of its financial targets for 2007,
writing off C$211 million in fourth-quarter trading and
structured-credit charges, and suffering a C$440 million loss in
commodity trading during the year. CIBC’s credit-related write-offs
for the year were worse, at C$978 million.
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By GlobalDataIt also announced that it is carrying about C$9.3 billion worth of
exposure to the US subprime residential mortgage market through
derivative contracts. CIBC said in a statement that “market and
economic conditions relating to these counterparties may change in
the future, which could result in significant future losses”.
Despite the subprime woes, however, CIBC reported record net income
for the year, of C$3.29 billion, up 24 percent.
National Bank of Canada, the country’s sixth-largest bank, reported
its first quarterly loss in 15 years for the fourth quarter as a
result of a C$575 million writedown of investments in asset-backed
commercial paper. Canada’s largest bank, RBC Royal Bank (RBC),
recorded a C$357 million pre-tax writedown for its investments in
US subprime mortgage securities.
For the year as a whole, a number of banks reported strong domestic
retail banking performances. RBC, for instance, reported lending
volumes up by 11 percent and deposit balances ahead by 6 percent.
Scotiabank’s domestic banking operation reported a 13 percent
growth in assets, recording market share gains in mortgages,
personal deposits, mutual funds and the small business
segment.
BMO, which reported net income for the year down 20 percent, was
able to record a record net income of C$1.25 billion for the year
for its Canadian retail banking arm. CIBC’s retail division
reported profitability up 39 percent for the full year. National
Bank of Canada reported growth of 9 percent in consumer loans
during fiscal year 2007 due to sustained growth in mortgages.
A challenging environment
For 2008, Scotiabank president and CEO Rick Waugh predicted a
“challenging environment”. Waugh committed Scotiabank to achieving
7 percent to 12 percent earnings growth, the same as the past
year.
TD’s Clark said he expected business growth to fall next year,
after a year which he described as “spectacular”. “We see 2008 as a
good year within our target 7 percent to 10 percent
earnings-per-share [EPS] growth range but perhaps at the lower end
of that range.”
TD expects to earn about C$1 billion from its US consumer and
brokerage businesses next year, boosted by its recent acquisition
of US retail banking group Commerce Bank (see RBI
580).
BMO, which has targeted per-share earnings growth of 10 percent to
15 percent for 2008, said that it is expecting the Canadian economy
to keep growing “modestly” in 2008 and expects reduced demand for
residential mortgages but healthy business investment. “Looking
ahead, our targets for 2008 reflect strong earnings momentum and
solid growth across all our businesses, while anticipating a weaker
credit environment,” said chief executive Bill Downe.
RBC has targeted 7 percent to 10 percent EPS growth for the new
year. CIBC, however, cut its targeted EPS, stating its objective is
growth of 5 percent to 10 percent per year, on average, over the
next three to five years.
