TORONTO -
Canada's banks are reporting weaker profits than a year ago, but even the feeblest of the Big Five is still raking in a net profit of $1.6 million a day while many major banks in the United States and elsewhere are effectively insolvent.
Bank executives are congratulating themselves that, as CIBC's Gerry McCaughey put it, "Canada finds itself better positioned than other economies both to weather this downturn and benefit from a subsequent recovery."
But the bankers also acknowledge that 2009 will be tough, and even maintaining flat earnings for the year will be hard as the shrivelling economy erodes their volume of business and cranks up the number of bad loans.
The Royal Bank, Canada's largest, said Thursday it earned $1.05 billion, almost $12 million every day, during the first quarter of the banking year. This was down 15 per cent from a year earlier, but better than Bay Street was expecting.
Also above analyst expectations was CIBC, which earned $147 million in the November-January period. That was better than its year-ago loss of $1.46 billion but still was corroded by hundreds of millions of dollars because of ongoing exposure to toxic debt instruments in the United States.
The Royal and CIBC reported a day after TD Bank started the quarterly series with a profit of $712 million, down from $970 million a year earlier but with all its businesses solidly profitable - even U.S. banking.
At a time when numerous American banks have had to be propped up with tens of billions of dollars of taxpayer support, TD chief executive Ed Clark declared that "the Canadian banks are in the best shape of any banking system in the world."
"People are relieved," said Jennifer Radman, associate portfolio manager at Caldwell Securities in Toronto. "Despite everything that's going on, the banks are still making a lot of money."
Still, "as economic headwinds in Canada and U.S. deepened and continued to negatively impact credit quality, (bad-debt) provisions for the first quarter remained on the rise," analyst John Aiken of Dundee Securities observed.
"We only expect the credit to worsen over coming quarters as the pressures felt within retail portfolios emanate outwards to the greater economy."
Nevertheless, Aiken noted that "even including these factors, Royal was able to generate positive reported earnings and an ROE (return on equity - a key profitability measure) just below 14 per cent, which other global banks will likely view with envy."
At CIBC, "they have righted the ship to a very small degree in some cases," Edward Jones analyst Craig Fehr said from St. Louis. "But there are still a lot of issues with this bank, a lot of risk inside the balance sheet."
Overall, Fehr added, "the Canadian banks, what's set them apart from many banking systems around the world to this point has been their capitalization and the lower amount of risk - and that trend, in the aggregate, is persisting."
The National Bank of Canada, the country's sixth largest, had first-quarter earnings of $69 million, down from $255 million a year earlier. It was afflicted by its heavy involvement in asset-backed commercial paper, and if not for the ABCP hit it would have earned $253 million.
"Their results this quarter are actually pretty good," Fehr said. However, he expects deteriorating Canadian credit quality to hit the Quebec-centred National hard, "because they don't have quite the diversity of their loan book that many of their bigger peers would have."
Still to report are Bank of Nova Scotia and Bank of Montreal, both next Tuesday. Analysts expect them, like the others, to be profitable but less profitable than in the balmy banking climate of recent years. Earnings per share are forecast to decline 10 per cent from a year ago at Scotiabank and about 20 per cent for BMO.
All the banks are maintaining their dividends and holding solid capital positions, with their ratio of loans to core capital being in the neighbourhood of 10 per cent. That's well above the regulatory floor of seven per cent, but nervous investors have been demanding such a plump cushion.
"The one overriding comment we can make for all the banks . . . is that capital . . . ratios remain quite robust, which I think is a very key metric in this environment," Fehr said.
"The market is not so much focused on the income statement and earnings as they are on the balance sheet and capital."
