TD, RBC miss profit estimates as bad loan provisions rise; CIBC beats

By Nivedita Balu and Niket Nishant

(Reuters) – Canada’s two biggest lenders, TD and Royal Bank of Canada, missed analysts’ estimates for quarterly earnings on Thursday as tough economic conditions spurred lenders to make higher provisions for borrowers falling behind on repayments.

TD, which called off its $13-billion acquisition of First Horizon this month, said it does not expect to meet its medium-term adjusted earnings growth target range of 7% to 10% due to the failure of the deal.

“We’re confident that this was the right decision,” the bank’s CFO Kelvin Tran said in an interview.

TD’s bid for First Horizon was expected to boost its expansion into the United States, a strategic priority for the bank as it looks outside of its home market, but the collapse of the deal has left investors wondering where its next avenue for growth lies.

Tran said the bank was still focused on its retail network expansion in the U.S. to accelerate organic growth.

The bank, Canada’s second biggest lender, said on Thursday it would buy back 30 million common shares.

“While credit and its own deposit performances were solid, we do not believe that the less than 2% share repurchase plan will generate much valuation support,” Barclays analyst John Aiken said.

For RBC, higher-than-forecast expenses were the culprit in the quarter, Aiken said.

The banks’ quarterly results follow those of Bank of Montreal and Bank of Nova Scotia on Wednesday which missed quarterly earnings, weighed by higher provisions, slower top-line growth and an increase in expenses.

An outlier was CIBC, which topped Bay Street estimates on a per share basis driven by higher revenue.

Canadian lenders have largely shielded themselves from the recent banking turmoil in the south of the border but the fallout from three U.S. bank failures has cast a chill over the sector in recent months as some major banks have looked at U.S. expansion for growth outside of home.

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Inflation, high interest rates and the banking crisis have also prompted lenders to set aside bigger provisions for credit losses to prepare for more borrowers falling behind on their loan repayments.

The surge in the benchmark interest rate has also boosted lenders’ net interest income, the difference between what they earn on loans and pay out on deposits.

All the big five Canadian banks set aside more funds for bad loans in the second quarter, amid a challenging housing market.

RBC’s net income fell 14%. On an adjusted basis, it earned C$2.65 per share, compared with analysts estimates of C$2.79. according to Refinitiv data.

CIBC’s earned C$1.70 per share, compared with analysts’ estimate of C$1.63 per share, according to Refinitiv data.

The banks noted a rise in expenses related to technology investments and employee-related costs.

TD’s net income, excluding one-off items, was C$3.75 billion or C$1.94 per share, also below expectations of C$2.07 per share.

($1 = 1.3372 Canadian dollars)

(Reporting by Nivedita Balu in Toronto, Mehnaz Yasmin, Niket Nishant and Jaiveer Singh Shekhawat in Bengaluru; Editing by Rashmi Aich, Mark Potter, Kirsten Donovan and Nick Zieminski)