Paul Bagnell

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As stocks powered higher during late 2019 and early 2020 before coronavirus fears gripped the markets, the table was being set for strong performance at the trading businesses of Canada’s big banks. And, as the just-completed first-quarter results from the Big Six have shown, the traders did not disappoint.

Capital markets segments were the clear star performers at the banks in the quarter, and most banks were able to report profits larger than analysts expected.

But a closer look at the results shows some pretty tepid numbers elsewhere in the banks’ operations.  Profit growth was muted in retail banking. Loan losses continued to creep higher. And banking operations in other countries did not rescue weak performance at home.

Here’s what we saw:

- Canadian retail banking: The days of routine double-digit profit gains in the banks’ core businesses are by now a thing of the distant past. But the most recent results suggest mid-single-digit gains may soon be a fond memory as well. Royal Bank of Canada and Bank of Montreal led the pack this time around, with Canadian profit gains in domestic retail banking of seven and eight per cent, respectively. Otherwise the numbers were dreary at National Bank (up four per cent), Bank of Nova Scotia (up five per cent), Toronto Dominion Bank (down two per cent) and Canadian Imperial Bank of Commerce (down two per cent).

- Loan losses: The bear case on Canadian bank stocks rests mainly on the view that the banks have lent too much money in a slowing Canadian economy, particularly to commercial borrowers. Eventually, the sceptics say, loan losses will mount to the point where banks will be forced to dramatically increase their provisions for credit losses – with a dramatic, dollar-for-dollar hit to profitability. Steve Eisman of hedge fund Neuberger Berman is the most prominent investor in this camp, and he has detailed his views for us more than once on BNN Bloomberg. In the quarter just reported, provisions for credit losses rose at Scotia, TD and BMO.          

- Non-Canadian banking: It’s been common for portfolio managers to say they prefer the Canadian banks with significant U.S. banking platforms. Toronto-Dominion Bank and Bank of Montreal fit this description best. But the pivot of the U.S. Federal Reserve to cut rates during 2019 has made the hunt for profit growth in the ultra-competitive world of U.S. banking much more difficult. This time around, TD reported just a two per cent increase in U.S. banking profit – and said revenue dropped by the same amount, owing largely to lower rates. At BMO, U.S. profit slid 19 per cent, something the bank chalked up largely to higher loan losses south of the border.

And Bank of Nova Scotia, of course, has always been known for its big banking businesses in Latin American and the Caribbean. Under CEO Brian Porter, Scotia has retooled its portfolio, putting more emphasis on the Pacific Alliance economies of Mexico, Peru, Colombia and Chile, and divesting several businesses in the Caribbean. Those banking operations were not a source of strength in the most recent quarter, with adjusted international segment profit down four per cent - a number that, according to analysts, does not include the effects of asset sales over the prior year.

- Dividend increases: They are huge part of the “own the banks” story, and this time around investors got hikes from TD, Royal and CIBC.