Interest rates

Rising interest rates drive up spreads on loans at TD and CIBC

The large TD sign on the exterior wall of a branch at King St. West and Bay St. in Toronto’s Financial District, is pictured January 4, 2021.Fred Lum/The Globe and Mail

Two of Canada’s largest banks are reaping the rewards of higher interest rates as lending profit margins rose in their third fiscal quarter, though growing economic malaise threatens to undermine some of those gains in the near future.

The Toronto-Dominion Bank (TD) reported lower third-quarter profit than the same period a year ago, in part due to high costs driven by inflation and rising provisions for loan losses . The Canadian Imperial Bank of Commerce (CIBC) also saw its profits fall in the quarter, facing the same headwinds.

But both banks saw good gains in net interest margins – the difference between what banks charge on loans and what banks pay on deposits. These profit margins were squeezed during the COVID-19 pandemic as central banks cut interest rates to extremely low levels. But central bankers quickly raised rates to fight high inflation, allowing lenders to reprice loans and deposits and reap more profits.

Banks expect margins to continue to rise in coming quarters, but at a slower pace. However, they also acknowledged that with high inflation, rising borrowing costs and significant economic uncertainty, demand for new loans, particularly residential mortgages, could fall. And banks expect delinquencies to start rising, from unusually low levels.

“If all the forecasts are correct in terms of what’s going to happen in the economy, with rates going up, with demand for credit slowing down a bit, you’re going to see a bit of offsetting of those factors,” he said. said Hratch Panossian. , CIBC’s Chief Financial Officer, in an interview.

Between expanding margins and slowing credit demand, however, “we believe net interest income will continue to have strong momentum going forward,” he said.

In TD’s major Canadian retail banking division, margins increased 9 basis points to 2.7% from a year earlier. CIBC’s personal and commercial banking margins in Canada increased 13 basis points to 2.52%. (One hundred basis points equals one percentage point.)

In TD’s US operations, gains were much larger, with margins up 46 basis points year-over-year to 2.62%. The bank’s focus on retail consumers and business customers makes it the most interest-rate sensitive among Canadian lenders, raising high expectations about the boost TD will get from the rise. rates.

“The bar was set very high here and while TD didn’t jump over it, the bank stepped through it cautiously,” Scotia Capital Inc. analyst Meny Grauman said in a note to clients.

Banks also still expect a rebound in credit card borrowing, which is a high-margin product as it charges high interest rates. Spending levels on cards are back above pre-pandemic levels, with transaction volumes up 10% year-over-year at TD and spending levels hitting a new record high. But the balance customers keep on these cards is still lower than it was before COVID-19. When that borrowing rebounds, it could also help banks’ credit lines.

“We’re seeing strong pent-up demand,” TD chief financial officer Kelvin Tran said in an interview.

TD earned $3.21 billion, or $1.75 per share, compared to $3.54 billion, or $1.92 per share, in the same quarter last year. But the bank also recorded a $678 million accounting loss on a hedging strategy it uses to manage interest rate risk from its $13.4 billion acquisition of U.S. bank First Horizon Corp. ., which awaits approvals from regulators.

Adjusting to exclude hedging costs and other items, TD said it earned $2.09 per share, above analysts’ consensus estimate of $2.04 per share, according to Refinitiv.

During the same period, CIBC earned $1.67 billion, or $1.78 per share, compared with $1.73 billion, or $1.88 per share, a year earlier. Excluding costs related to CIBC’s acquisition of retailer Costco’s credit card portfolio and other items, the bank said it earned $1.85 a share, down from analysts’ expectation of $1.84. per share.

TD and CIBC joined National Bank of Canada as the top three lenders that have so far met or exceeded analysts’ expectations for the third quarter. Earnings for the Bank of Nova Scotia and the Royal Bank of Canada came in below estimates, and the Bank of Montreal will report on that next week.

In most cases, year-over-year earnings comparisons have been hampered by rising loan loss provisions, weak financial market results and rising costs. But underlying trends such as growth in loan balances and the health of consumer credit still look solid.

“Results are quite strong given the challenging macroeconomic outlook,” Rob Colangelo, vice president and chief credit officer at Moody’s Investors Service, said in an interview. “We could see some moderation in loan growth, you could see margins continuing to rise. … Overall, the environment still bodes well for banks.”

Even so, lenders are taking a more conservative stance by adding provisions for credit losses to build up reserves to cover loans that might default. TD added $351 million in provisions during the quarter and CIBC set aside $243 million. In both cases, part of the increase was driven by changes in business models that anticipate future problems with loans still repaid today.

“This quarter, we’ve updated some of our economic scenarios to be more conservative,” TD’s Mr. Tran said. “There is a lot of uncertainty in the market and we will have to see how it goes”

Your time is valuable. Receive the Top Business Headlines newsletter in your inbox morning or evening. register today.