CIBC, RBC pull away from Canada peers on better credit forecast

When it comes to credit quality, two of Canada's Big Six lenders were clear winners last quarter: Royal Bank of Canada and Canadian Imperial Bank of Commerce, which both set aside much less money to cover loan losses than expected, fueling solid earnings beats in the process.

At the other end of the spectrum stood Bank of Montreal, which faced a round of analyst downgrades this week on growing concerns that it is an outlier in its overexposure to commercial loan losses in Canada and the U.S. 

While Bank of Nova Scotia, National Bank of Canada and Toronto-Dominion Bank posted loan-loss provisions largely in line with analyst estimates, total provisions for all six actually fell for the three months through the end of July, bucking a trend of provisions steadily eating into earnings over the past two years. 

The results underscore how Canada's steady but fiercely competitive banking market is recovering — albeit unevenly — from a post-Covid uptick in commercial and personal credit losses, as borrowers struggled to pay back their loans amid persistently high rates. 

Still, executives at RBC and CIBC warned that there's likely still pain to come this credit cycle, as unemployment ticks higher and recent rate cuts by the Bank of Canada — and an expected cut by the US Federal Reserve — will take time to work through the financial system.  

"We think we're getting closer to peak unemployment now, but it is still on the rise. And we still see a consumer who faces a lot of headwinds with the current rate environment," RBC Chief Risk Officer Graeme Hepworth said on a conference call Wednesday. "Yes, rates have come down, but many of these consumers still haven't faced the full impact of kind of the repricing of their mortgages and the associated payment impact that comes with that."

At CIBC, Chief Risk Officer Frank Guse said that while the lender has "put the worst behind us" on credit pain tied to U.S. office building loans, overall stress in that market is not over yet. 

"We are not expecting any of the large losses we have seen previously to reoccur, but what we are saying here is there could be some that will still come," Guse said. 

Retail Banking Momentum

Provisions are a closely watched gauge because they represent how much a bank expects to lose in the future on loans that go bad. RBC set aside CA$659 million ($489 million) of provisions in the fiscal third quarter, 28% lower than analysts had forecast. CIBC's CA$483 million was 12% lower than expected. Their adjusted earnings-per-share also handily beat expectations, with RBC outperforming by 9.7% and CIBC by 11%. 

RBC and CIBC also posted revenue growth, with particular momentum in their Canadian personal and commercial banking units, where RBC also benefited from the first full quarter of results that included the integration of HSBC Holdings Plc's Canadian assets.  

"Royal Bank's Canadian banking unit was a key reason for the beat, and we have seen that trend at other banks this earnings season," Scotiabank analyst Meny Grauman said in a report, adding that RBC's wealth division also posted better-than-expected results.

Indeed, all of the country's big lenders reported strength in personal and commercial banking, even beleaguered Toronto-Dominion Bank, which saw decent operating results in the period overshadowed by a new $2.6 billion provision for penalties it expects to face in U.S. anti-money laundering probes. 

Canada-focused National Bank, which posted a 15% year-over-year increase of earnings in domestic personal and commercial banking, offers investors a respite from U.S. turmoil. 

"Beyond impressive numbers is Canadian bank investors' sudden insatiable appetite for Canadian exposure, and National Bank has plenty of that. That makes it a very hot commodity despite the fact that it already came into earnings season trading at an ~4% premium to peers based on next year's consensus EPS," Grauman said in a separate report.

Capital Markets Dip

Meanwhile, a resurgence in dealmaking that helped boost U.S. banks' second-quarter earnings last month didn't carry through to the same extent at Canadian banks. However, analysts noted that it's tricky to compare the results directly as the Canadian lenders' fiscal third quarter includes the traditionally slower month of July. 

New Highs

Finally, RBC and National Bank shares hit new all-time highs following their solid results and CIBC's stock also got a boost after it beat expectations, sending it to its highest level since March 2022. And Scotiabank's in-line results earned its shares a lift after it reported on Tuesday, though it lost some of that momentum in the following days. 

But the cloud of credit concerns over BMO and TD's unresolved U.S. money laundering probes were an overhang for both companies, whose shares slumped after they reported.