Our love affair with debt keeps Canada’s banks on top

BloombergCanadian banks lived up to their reputation for cranking out profits even in brutal conditions today — and they have Canadians' appetite for debt to thank. But for how long?

Canada’s banks have a well-deserved reputation for cranking out profits even in brutal conditions, and given the positive results from the start of third-quarter earnings season the halo isn’t going away any time soon.

Bank of Montreal and Bank of Nova Scotia both came out ahead of analyst expectations and just to reinforce the warm, fuzzy feeling among investors, they boosted their dividends.

It’s almost as if the gloomy headlines of the past several quarters around mounting consumer debt in Canada and darkening storm clouds over Europe and China didn’t happen.

One reason the banks are having an easy time compared to many of their international peers is because of the resilience of the Canadian economy, which has managed to avoid much of the turmoil buffeting other regions.

Another reason is the domestic consumer’s appetite for debt, especially mortgages. Despite lacklustre borrowing by businesses and volatile capital markets revenue, the Canadian banks have managed to meet or exceed Street expectations over the year, and that’s happened largely on the strength of consumer loan volumes, primarily mortgages.

Today’s results bear that out.

BMO posted adjusted cash earnings of $1.49 a share, compared to the consensus of about $1.38.

The country’s fifth biggest bank has been aggressively expanding its U.S. operation but its biggest earnings driver remains the domestic personal and commercial business, which contributed $453-million to the bottom line, up 2.4% from last year.

Scotiabank had adjusted cash profit of $1.22 a share, beating the Street estimate of $1.19. (The results included a gain on the sale of the bank’s Toronto headquarters.)

Domestic banking, the biggest earnings driver, had a profit of $521-million, up 22% from last year on higher loan volumes and lower provisions for credit losses.

But there are signs already that it can’t go on for ever. Loan volume growth has slowed sharply from over 6% annually to around 2% or 3%, as households start to respond to warnings by policy makers such as Bank of Canada Governor Mark Carney that they need to start to pay down debt.

The trend is hitting all the big banks. To avoid potential trouble down the road, players need to find a way to replace those declining revenues, and analysts are scrutinizing bank results closely for signs that’s happening.

Barclays Capital analyst John Aiken said in a note to clients that while Bank of Nova Scotia came in above analyst estimates, the markets will likely show more interest in the international division which operates in more than 40 countries including Latin America and Asia. Unfortunately, earnings and loan growth there “were essentially flat,” according to Mr. Aiken.

 

For its part, Bank of Montreal managed to meet expectations for its U.S. operation — which significantly increased in size last year following the acquisition of Wisconsin-based Marshall & Ilsley — while growing profits in capital markets and wealth management.