Canadian Underwriter

TD Bank follows peers in preparing for economic downturn, hitting Q3 profit

August 26, 2022   by Ian Bickis

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TD Bank Group followed several of its peers in reporting a profit drop for the third quarter as banks set aside funds for a potential recession ahead, even as loans continued to grow and consumer savings rates remained elevated.

The return to climbing provisions for credit losses, which are counted against income, has been one of the dominant trends so far this earnings season with only BMO left to report next week.

Banks rode a wave of profit beats last year as they unwound portions of the provisions they had built up in the early days of the pandemic, and are now seeing the reverse as they build reserves because rising central bank interest rates increase the likelihood of a recession.

TD, which set aside $351 million in the latest quarter for potential loan losses compared with a $37 million recovery last year, noted that the move is prudent for potential risks ahead but that both loan provisions and bad loans remain low.

“While these key credit metrics are at or near cyclical low levels, economic risks remain elevated, reflective of persistent inflation and rising interest rates and the increasing risk of a recession,” said Ajai Bambawale, chief risk officer of TD on an earnings call Thursday.

His comments echo those of William Bonnell, executive vice-president of risk management at National Bank, who said Wednesday that despite rising worries, the economy is still showing strength in unemployment and GDP numbers.

“That is what’s generating really exceptional performance in credit, not just at our bank, but across, I think, the sector in impaired loans. So delinquencies remain low, savings rates remain high. It’s a strange situation where current conditions are so benign and yet, there’s so much uncertainty in the forward views.”

The uncertainty has seen banks report sharp increases in deposits as consumers look for safe places to park their money. TD reported an eight per cent increase in deposits, while RBC noted Wednesday it saw more than $10 billion flow into its GIC term deposits and that deposits are 30 per cent above pre-pandemic levels.

The popularity of term deposits, which have seen a spike in interest rates to over four per cent at many financial institutions, put pressure on Scotiabank’s net interest margins, while TD Bank’s large U.S. retail presence allowed it to reap much greater benefits from rising interest rates.

Loans are also still growing, with TD reporting a nine per cent loan volume increase and some other banks reporting gains in the low double digits. The pace of growth is slowing in some areas though, especially on the mortgage side, with several banks reporting quarter-over-quarter growth in the low single digits.

Banks noted that while the risks around the mortgage market are increasing, they remain confident in their risk management of the sector. Delinquency rates remain low, while the most highly-leveraged loans, taken out at the peak of the pandemic real estate frenzy, are not up for renewal until around 2025.

Commercial loans are also still showing strength, despite uncertainty, said CIBC chief executive Victor Dodig, on an earnings call Thursday.

“Despite economic uncertainties, entrepreneurs remain cautiously optimistic about near-term growth opportunities. As a result, we expect to see continued growth with our clients across our commercial banking business.”

And consumers continue to spend. TD said its card business showed loan volume up 10 per cent from last year on record spending.

Banks did see pressure on the capital markets side as the underwriting business saw a sharp drop in the quarter. Some banks, including TD, saw a boost to trading revenue on increased market volatility, but others saw revenue in the area slip below analyst expectations.

The overall trends pushed TD revenue to $10.93 billion, up from $10.71 billion last year, including record revenue of $7 billion for Canadian retail banking.

However credit provisions, as well as $678-million adjustment related to its pending acquisition of U.S.-based First Horizon Bank, pushed earnings down nine per cent from last year to $3.2 billion.

The bank said that on an adjusted basis it had profits of $3.8 billion, or $2.09 per share, up about five per cent from last year.

Analysts on average had expected an adjusted profit of $2.04 per diluted share, according to financial markets data firm Refinitiv.


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