By John Tilak
TORONTO, Dec 3 (Reuters) - Investors are overlooking
forecast-topping profits reported by Canadian banks this week
and choosing instead to focus on the lenders' ability to grow in
a weak economy that is feeling the heat of depressed oil prices.
The banks variously benefited from cost cutting and from
lower tax rates, gains analysts said may not last. Canadian
banks are also trying to counter slow domestic growth by
expanding to new markets, potentially adding risk.
Investors are also worrying about lackluster loan growth,
pressure on net interest margins and a challenging housing
market.
"It's going to be harder to drive growth year after year.
The big unknown is how they're going to continue to grow," said
Kevin Headland, director, capital markets and strategy, at
Manulife Asset Management, which manages about US$294 billion
and owns several Canadian bank stocks.
"If expectations remain elevated, they're eventually are
going to have some missteps," he added.
Shares of the country's five biggest banks slipped on
Thursday, even as Toronto Dominion Bank TD.TO and Canadian
Imperial Bank of Commerce CM.TO reported fiscal fourth-quarter
earnings per share close to or better than expectations.
Profits at both TD, Canada's biggest lender by assets, and
CIBC were driven by their domestic retail and capital markets
divisions. CIBC, the No. 5 bank, also raised its dividend.
On Wednesday, Royal Bank of Canada RY.TO topped C$10
billion (US$7.48 billion) in annual profit for the first time in
Canadian history, following reports earlier in the week from
Bank of Nova Scotia BNS.TO and Bank of Montreal BMO.TO .
Canadian lenders delivered strong results even as an oil
prices slump pushed the country into a modest recession in the
first half.
The banks said they are closely monitoring energy sector
clients. Some banks added more clients to their oil and gas
watch lists in the fourth quarter but said they did not see any
big damage to their bottom lines at any point soon.
"It's not something that's going to be pivotal for us in
terms of making or breaking a certain quarter on earnings," RBC
Chief Financial Officer Janice Fukakusa said in an interview on
Wednesday.
She added that while there will be further weakness if oil
stays cheap, a pickup in merger and acquisition activity could
offset some of that.
Scotiabank and CIBC have the biggest exposures to the energy
sector, while TD has the smallest. TD and Scotiabank executives
told Reuters this week that they have not relaxed terms for
their energy clients.
Bad loans in the energy sector rose for all the banks from a
year earlier, and as they mount there are concerns that they
could result in more writedowns and losses.
While the banks' energy sector loans overall are small
relative to their mortgage and consumer lending, some investors
noted those business segments could also be hit if low oil
prices persist.
"As long as oil remains under pressure, which it looks like
it will be for most of 2016, then we're going to see limited
upside for the banks," said John Stephenson, president of
Stephenson & Co Capital Management, which owns shares of TD and
Scotiabank.
To be sure, some investors remain bullish on the sector,
given that oil prices appear to have stabilized and the Canadian
economy is still growing.
"I am positive on the banks. Their oil and gas exposure is
not huge and their loan experience has not been that bad," said
David Cockfield, a portfolio manager at Northland Wealth
Management, which owns TD, Scotiabank and BMO shares.
"If oil is still at $40 six months from now, I would
definitely become more concerned."
($1 = 1.3361 Canadian dollars)
(With additional reporting by Matt Scuffham)