Toronto-Dominion Bank and the Canadian Imperial Bank of Trade can thank the warm US economy for greater profits. But large US bank operations are not expected to provide such a high growth in 2019 due to increased competition.
TD and the CIBC, both announced late in the year's revenue Thursday, have a lot of US exposure after major acquisitions. Lately, the growth of profits from these divisions has been encouraging – especially for TD. The bank, which suffered several years of anemic returnees in its personal and commercial bank in the United States after the global financial crisis, recorded annual profits from US retail banking from 26 percent to 4.2 billion dollars.
It is strange now that now the concern is that the US economy is doing too well. The recovery has been nearly a decade, and inflation and wages have been smashing, prompting the Fed to raise interest rates eight times over the past two years.
As the business is booming, the US banking market has become extremely competitive. "Competition has increased," said analyst DBRS Ltd. Robert Kolangello. "Although the United States is a very big market, it's limited how much the bank's market share can take – especially on a commercial side."
Representatives from both banks reiterated this feeling in the conference calls Thursday. "It's certainly competitive" when it attracts commercial deposits, said Greg Braca, head of the US banking group in TD.
"We reached a threshold," said Larry Richman, head of the US region for CIBC. "As rates rise, customers who have cash surplus want to pay for it."
Retail and commercial banks make money by attracting cheap deposits and lending to this money at higher rates. Lately, US banks have been able to charge more on loan because interest rates are rising.
But the market for attracting deposits is also becoming more aggressive, which will force banks to pay for deposits, slowing their growth in credit growth.
Even more clouds are formed over the US economy. In a report released on Thursday, the Standard & Poor's Credit Rating Agency noted that "the risk of a recession for the United States has increased and growth is likely to slow even if the US and China tariff disagreements do not escalate into a commercial war."
S & P said that the chances of a crisis in the next 12 months are 15 to 20 percent, compared with 10 percent to 15 percent in the previous forecast.
Despite changes in the US, total earnings in both banks are expected to be higher next year. TD is particularly optimistic, and chief executive Barat Masrani predicted an overall revenue increase of 7 to 10 percent in fiscal year 2019.
CIBC is slightly less bullish, expecting an expansion of 5 to 10 per cent. However, the bank remains optimistic about the quality of the credit book. "While there are still potential heads, because we feel we are entering the later part of the economic cycle, we remain confident in our strong risk-taking laws and the quality of our loan portfolios," said Lora Doori-Atanasio, chief risk manager, in a conference call.
Investors have had a variety of profits reappeared on Thursday. TD shares were relatively flat by the end of trading day, closing at $ 73.48, while CIBC shares fell 3 percent to $ 112.46.
For the full fiscal year that ended October 31, TD reported a net income of $ 11.3 billion, nearly 8 percent higher than fiscal year 2017, while CIBC's annual profit rose to $ 5.2 billion, an increase of 12 percent of the previous year.
Earlier this week, TD and the CIBC announced details of their participation in the acquisition of Air Canada for Aeroplan's loyalty rewards program. TD is heavily betting on Aeroplan, committing to a $ 1 billion advance payment and future expenses as a major financial partner. His agreement with Air Canada will begin in 2020 and will last until 2030.
CIBC will be a secondary partner in the new arrangement and agrees to pay a total of $ 292 million for participation.