Bank earnings offer hints of economic rebound

For those who view Canada's banks as proxies for the economy as a whole, this week's bank earnings reports are all but shouting that recovery is indeed at hand.

Bank after bank said their third-quarter profits came in better than analysts had been expecting. Three banks — National Bank, Royal Bank, BMO — actually reported record earnings in the quarter ending July 31. 

A look behind the numbers reveals how they managed to improve their numbers at a time when the country was fighting its way out of recession.

Analysts say many banks reported lower-than-expected loan losses. At BMO, its provision for credit losses — the amount it set aside to account for loans gone bad — dropped 14 per cent. At TD, the drop was almost 16 per cent.

'Writeoffs aren't as bad'

"Key to the bank numbers is the fact that writeoffs aren't as bad," said Irwin Michael, a portfolio manager at ABC Funds.

"So if the economy is getting better, thanks to a lot of the money that was thrown out into the marketplace by the monetary authorities, that helps the banks and if it helps the banks, it helps the economy, which helps labour and everything else. Bit of a chain reaction."

Even banks that reported higher loan loss provisions, like CIBC, said they saw credit conditions improving in several areas.

"[Credit card] delinquencies have improved both on a quarter-over-quarter basis and a consecutive month-over-month basis throughout the third quarter," CIBC Retail Markets president Sonia Baxendale said during a conference call.  

Bank of Nova Scotia was another firm that saw its loan losses inch higher, to $554 million, up from $159 million last year, the bank said on Friday.

But Scotiabank, too, was downplaying the risk. "Provisions for credit losses, including an increase in the general allowance, are within our expectations and risk appetite," CEO Rick Waugh said in a statement.

Bank CEOs were rushing to declare that the credit crisis that had hobbled their earnings before was easing. "Global capital markets continued to improve from last quarter and we have seen some signs of recovery in the general economy," RBC chief executive Gord Nixon said during a conference call.

TD Bank CEO Ed Clark said if TD's various business lines could perform well during a global recession, then it bodes well for the future. "We see tremendous potential upside in those earnings once conditions normalize," he said.

'Green shoots' sprouting

There were other signs this week that suggest the Canadian economy has turned the corner, including:

• the Canadian Real Estate Association dramatically increased its forecast for home sales this year.
• the Conference Board of Canada said consumer confidence surged to its highest level in more than a year.
• retail sales in June grew more than expected as Canadian consumers were in better shape than their U.S. counterparts.

Of course, there are still hurdles that remain — both for the Canadian economy, Canadian consumers, and Canadians banks. Unemployment is poised to continue to climb, leading to more personal bankruptcies and retail credit losses. 

Also uncertain is the pace of the U.S. recovery, where a majority of Canadian banks have a significant presence. While many analysts see the U.S. emerging from its almost two-year-long recession this fall, the bounce back is expected to be anemic at best. 

So significant risks remain. But if this week's bank earnings show anything at all, it's that even in the toughest of environments, they have ways of generating revenues and profits than can offset losses in weaker business lines.

That strength allowed Canadian banks to continue operating through the financial crisis without direct government bailouts, unlike in the U.S. and Britain. It also led the World Economic Forum to declare the Canadian banking system the soundest in the world last year.     

That resilience — evident in this week's bottom lines and in the lack of dividend cuts — helps to explain why Canadian bank shares have, on average, almost doubled since March.

Less to hate?

Canadians typically love to hate the big banks and the millions they charge in service fees. But there's research that suggests that the relative stability of the Canadian banking system amid all the global financial carnage may be softening some of those attitudes.

"We've seen an increase this year in the overall reputation of the banks according to Canadian consumers," Dave Scholz of Leger Marketing told CBC News on Thursday. He said Canadians seem to dislike the banks less these days. 

That warm and fuzzy feeling may evaporate, of course. But for now, Canadians seem to be acknowledging that the Canadian banking machine's steady profits may have saved them from having to dig deep to pay for multibillion-dollar bailouts.