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Last Trade - 25/09/20

Sector
Financials
Size
Mid Cap
Market Cap £1.36bn
Enterprise Value £3.19bn
Revenue £516.9m
Position in Universe 158th / 2683

RPT-WRAPUP 1-Canadian banks brace for tougher times as 'Goldilocks' era winds down

Fri 30th August, 2019 12:00pm
(Repeats story first published on Thursday)
    By Nichola Saminather
    Aug 29 (Reuters) - Canadian banks face challenging times as
souring macroeconomic conditions and trade uncertainties
increase lending risk and weigh on profit margins, investors and
analysts said on Thursday after major lenders wrapped up their
quarterly earnings season.
    TD Bank Group  TD.TO , the country's No. 2 lender by market
value and the last of Canada's top six banks to report quarterly
profits on Thursday, slightly missed analysts' expectations.
    The latest earnings season for Canadian banks saw higher
loan loss provisions, subdued margin growth and capital markets
weakness offsetting retail and wealth management strength, with
three of the top six banks missing market expectations for
profit growth.
    "The last few years have been an absolutely Goldilocks
environment for credit for the banks," as low interest rates and
unemployment eased consumer burdens while robust profits helped
commercial loan books, said Brian Madden, portfolio manager at
Goodreid Investment Counsel. 
    "It's not unreasonable to think we will have a recession
within the next couple of years ... so credit provisions could
go significantly higher," he said. "And net interest margins
could be compressed because central banks are cutting rates."
    Banks are raising bad debt provisions as they take a
worsening macroeconomic outlook into account in their
assumptions about future loan-loss levels at a time when
household debt in Canada is near a record high. 
    "We've been saying for a number of years that credit quality
has been exceptionally benign," TD Bank Chief Financial Officer
Riaz Ahmed said in an interview. "We're starting to see some
normalization of that ... Macro news around trade, Brexit etc.
are creating uncertainties."
    Loan-loss provisions at TD Bank climbed 17% to C$655 million
($493.4 million) in its third quarter. While that was better
than analysts' expectations, the bank reported adjusted net
income of C$1.79 per share, missing estimates by 1 cent. 
 urn:newsml:reuters.com:*:nL3N25P348
    TD Bank shares closed up 0.5% at C$71,87, compared with a
0.7% gain for the Toronto Stock Exchange's S&P/TSE composite
index  .GSPTSE .
    
    BANKS UNDERPERFORM
    Canadian banking stocks have underperformed the broader
market in 2019, with the sector sub-index  .GSPTXBA  up 5.2%
this year, compared with a 14.4% rise in the benchmark Toronto
stock index. Canadian banks are trading at an average
price-to-book ratio of 1.06, the lowest level since February
2016, according to Refinitiv data. 
    Amid mixed results, Canada's six top banks, including Royal
Bank of Canada  RY.TO  and Bank of Montreal  BMO.TO , have
raised amounts set aside to cover bad loans by 27% to C$2.45
billion in the three months ended July 31 from a year earlier.
    Smaller Montreal-based lender Laurentian Bank of Canada
 LB.TO  on Thursday said provisions jumped nearly 2.5 times to
C$12.1 million in its third quarter from a year earlier.
 urn:newsml:reuters.com:*:nGNX2qrVc7
    Some of the commercial credit provisions across the industry
are due to persistently low energy prices, said Greg Taylor,
chief investment officer at Purpose Investments.
    "The energy sector has some concerns broadly across the
Canadian economy, so it probably makes sense to increase
provisions for credit losses in that sector," Taylor said. 
    Overall, Canadian banks have done slightly better than
expected, Taylor said. "While a lot of people are concerned
about the inverted (U.S. Treasury) yield curve, it doesn't seem
to be affecting earnings yet."
    Even so, Canadian banks have posted subdued, if any, margin
growth. A three-basis-point increase in net interest margins in
TD's Canadian retail operation was more than offset by a
six-basis-point drop in its U.S. retail business from a year
earlier.  urn:newsml:reuters.com:*:nFWN25P0ST
    "We do see some compression in margins that can arise from
the overall interest rate environment," TD's Riaz said, adding
that this could "be mitigated by volume increases and better
credit performance." 
    TD posted 11% growth in adjusted earnings in U.S. retail and
a surprise 9% increase in wholesale banking, which includes
capital markets and investment banking, while Canadian retail
income rose 3.4%.         
    Across the sector, growth was driven by increases in
domestic retail, U.S. commercial and wealth management
businesses, while capital markets units lagged. Bank of Nova
Scotia  BNS.TO , Canada's most international bank with a focus
on Latin American markets, shone.   
    Separately, smaller lender Canada Western Bank  CWB.TO  on
Thursday reported earnings of 81 Canadian cents a share, up from
70 cents a year ago, sending its shares soaring to their highest
level since November.  urn:newsml:reuters.com:*:nCNWyZ8PPa
 ($1 = 1.3275 Canadian dollars)

 (Reporting by Nichola Saminather in Toronto;
Editing by Denny Thomas and Paul Simao)
 ((Nichola.saminather@thomsonreuters.com; +1 416 687 7604;))
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