Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce can thank the hot US economy for higher profits. But major operations by American banks are not expected to provide growth of 2019 due to increasing competition.
TD and CIBC, which both released year-end earnings on Thursday, had much exposure to the United States after a major acquisition. Lately, profit growth from the division has been encouraging – especially for TD. The bank, which bears many years of return on anemia in US private and commercial banks after the global financial crisis, saw annual profits from US retail banking jump 26 percent to $ 4.2 billion.
Strangely, the worry now is that the US economy is doing well. The recovery of almost a decade and inflation and wages ticked higher, prompting the Federal Reserve to raise interest rates eight times in the past two years.
Because business is booming, the US banking market has become very competitive. "Competition has increased," said DBRS Ltd analyst Robert Colangelo. "Although the US is a very large market, it is limited to how much market share the bank can take – especially on the commercial side."
Executives from both banks echoed this sentiment in a conference call Thursday. "It's definitely competitive" when luring commercial deposits, said Greg Braca, head of the US banking group at TD.
"We have reached the threshold," said Larry Richman, head of the US region for CIBC. "When prices increase, clients who have excess money want to pay for it."
Retail and commercial banks make money by attracting low-cost deposits and lending this money at higher interest rates. Lately, US banks can charge more per loan, because interest rates have increased.
But the market for attracting deposits is also increasingly aggressive, which will force banks to pay deposits, slowing the growth of their loan margins.
Several more clouds are also forming above the US economy. In a report released Thursday, credit rating agency Standard & Poor's noted "the risk of recession for the US has increased and growth is likely to slow even if the US-China tariff dispute does not increase into a trade war."
S & P said the possibility of a decline over the next 12 months was 15% to 20%, compared with 10% to 15% in the previous estimate.
Despite a shift in the United States, total revenues in both banks are still expected to be higher next year. TD is very optimistic, with Bharat Masrani chief executive predicting total profit growth of 7 percent to 10 percent in fiscal 2019.
CIBC is slightly less bullish, expecting expansion of 5 percent per 10 percent. However, the bank remains optimistic about the quality of its loan books. "While there is still potential for headwinds, because it feels like we are entering the final part of the economic cycle, we remain confident in strong underwriting practices and the quality of our credit portfolio," said risk chief official Laura Dottori-Attanasio in a conference call.
Investors have a different reaction to profits announced Thursday. TD shares were relatively flat at the end of the trading day, closing at $ 73.48, while CIBC shares fell 3 percent to $ 112.46.
For the full fiscal year, which ended October 31, TD reported net income of $ 11.3 billion, almost 8 percent higher than fiscal 2017, while CIBC's annual profit rose to $ 5.2 billion, up 12 percent from the previous year.
Earlier this week, TD and CIBC announced details of their participation in the acquisition of the Aeroplan Air Canada loyalty program. TD bet heavily on Aeroplan, committed to an initial payment of $ 1 billion and future expenses as the main financial partner. His contract with Air Canada will begin in 2020 and will last until 2030.
CIBC will be a secondary partner in the new arrangement, and has agreed to pay a total of $ 292 million to participate.