THE PERFORMANCE of Canada’s five biggest banks in the first quarter has underlined the contrast between them and many of their US and European rivals.
Royal Bank of Canada (RBC), Toronto-Dominion, Bank of Nova Scotia, Canadian Imperial Bank of Commerce (CIBC) and Bank of Montreal have all in the past week posted first-quarter profits and maintained their dividends.
However, they have taken fresh writedowns on holdings of troubled securities and lifted loan-loss provisions in anticipation of a further slowdown in the North American economy.
The banks reported combined net income of almost Can$3 billion (€1.85 billion) for the three months to January 31st.
Returns on equity ranged from 4 per cent for CIBC to Scotiabank’s 16.9 per cent.
“We are in good shape not only to weather this unprecedented storm but to come out in a very strong position with the ability to capitalise on growth opportunities,” Scotiabank chief executive Rick Waugh said yesterday.
Bank of Montreal recently paid C$375 million for AIG’s Canadian life assurance business.
The Canadian banks have benefited from vast and stable retail networks and a more conservative approach to lending than their US counterparts, especially in housing.
All have capital ratios well above the regulatory minimum.
They have raised more than C$9 billion in common equity and preferred shares over the past six months, and Royal unveiled another C$200 million preferred share issue last week. Government support has so far consisted mainly of providing liquidity through regular auctions for high-quality mortgages held by the banks and other lenders.
The authorities have also raised the limit for preferred shares qualifying as tier-one capital.
RBC and Toronto-Dominion are among only seven banks in the world that still carry a Moody’s triple-A credit rating.
None of the five banks has cut its dividend since the second World War.
However, investors are sceptical they can maintain this. Over the past year they have outperformed banks globally by 30 per cent but their shares are still down 40 per cent collectively.
Bank of Montreal, considered to be most at risk of a dividend cut, currently offers a dividend yield of 10 per cent. It said yesterday that it was raising its loan-loss provisions to C$428 million, up 86 per cent from a year earlier. Most of the increase relates to real-estate lending in the US, where it owns Chicago-based Harris Bank.
Scotiabank, the most global of the five, almost trebled its provisions. “Signs of credit deterioration are clear,” said RBC Capital Markets analyst André-Philippe Hardy, who has advised clients it is still too early to buy Canadian bank shares.
The banks lowered their prime lending rates yesterday after the Bank of Canada dropped its trend-setting overnight lending rate from 1 per cent to 0.5 per cent.
The central bank has expressed confidence that "once . . . global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialised economies". – (Financial Times service)
