Banks post better-than-expected quarter, but all eyes on BoC rates

David Friend, The Canadian Press</span>
Published Thursday, August 31, 2017 7:08AM EDT
Last Updated Thursday, August 31, 2017 2:17PM EDT

TORONTO -- Canada's biggest banks had a better-than-expected third quarter thanks to a strong domestic economy, but a potential Bank of Canada move to raise interest rates to ease oversized growth could put extra pressure on their consumer lending books in coming quarters, financial analysts suggest.

TD Bank (TSX:TD) wrapped up the banks' earnings season Thursday with a 17 per cent increase in profits to $2.77-billion, anchored by a strong performance at its retail operations in both Canada and the United States. The net income amounted to $1.46 per share in net income and $1.51 per share of adjusted earnings, which was above analyst estimates of $1.36 per share.

TD's Canadian retail banking arm accounted for $1.73 billion of net income for the three months ended July 31, up 14 per cent from last year. The division's improvements benefited from lower insurance claims, growth in wealth assets and a record level of real estate lending originations -- which include new mortgages and renewals.

"This was a great quarter for TD reflecting impressive earnings and revenue growth, better credit performance across all our businesses, and lower insurance claims," TD chief executive Bharat Masrani said in a statement ahead of a conference call with analysts.

Also on Thursday, Statistics Canada reported second-quarter GDP data that blew away forecasts with an annualized growth rate of 4.5 per cent -- resulting in the strongest expansion of the economy in the first half of the year since 2002, adding further credence to predictions the Bank of Canada will make a second move of the benchmark rate in the coming weeks.

Many observers have noted plenty of uncertainty that could emerge next year as the Bank of Canada and U.S. Federal Reserve contemplate further interest rate hikes. In Canada, debt loads are sky high and a potential economic shock that could hit household incomes could affect some Canadians' ability to pay back loans.

However, Canada's big five financial institutions are charging ahead with steadfast optimism in their outlook.

BMO and Scotiabank, which both reported improved second-quarter earnings on Tuesday, expressed confidence in the pace of economic growth, especially after talking to their corporate clients in the United States and Canada.

It's a rarity within the country's relatively conservative banking industry to hear executives across several of the banks speak with such confidence in the face of many lingering questions about interest rates and the broader economy, but analysts suggest it could be taken as a good sign.

"This is one of the more bullish quarters in terms of outlook for the banks that we've seen in a while," Barclays analyst John Aiken said Thursday.

"It's really predicated on expectations the Canadian economy will continue (at its current pace) and no disruption in other areas."

Aiken said what plays out afterwards will be telling for the momentum of Canada's economic growth next year.

"The biggest swing factor is really going to be what the housing market in the GTA does in the fall when we get a little more normal activity," he said.

"We've seen the policy impact on prices and volumes in summer and that's not really the true marketplace."

Aiken said he will be paying attention to the direction of housing prices, which are likely to solidify consumer confidence and keep borrowing intact if they stabilize.

None of these signs are likely to emerge for several quarters, said Gareth Watson, vice-president of investment management at GMP Richardson Ltd.

"The fallout or impact of higher interest rates on the consumer rarely is felt immediately," he said.

"Because rates may have gone up at the Bank of Canada once doesn't mean all the sudden you can't afford your home today. But it might be a different story five years from now when you go to renew your mortgage."

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