Canada’s big banks reported record annual profits for 2013, buoyed by a strong domestic banking market, but stormier seas may lie ahead as they head into next year.
With Canada’s housing market anticipated to cool, and consumers already carrying record amounts of debt, the banking sector faces challenges to find growth.
“I think it is going to be pretty sluggish growth for loans here, especially if the housing market starts to slow down,” said Ian Nakamoto, a portfolio manager at MacDougall Investment Counsel.
“I also think the demographics are starting to bite them in Canada. Meaning, as you get older, people tend to borrow less. They tend to pay down their obligations.”
It has been a strong year for Canadian bank stocks, with the sector up roughly 20 per cent for the year. However shares in several of the banks sold off this week as the results came in.
The Bank of Nova Scotia, the last of the big Canadian banks to report its quarterly and annual results, capped the sector with a record annual profit of nearly $6.7 billion Friday, but fell just shy of investor expectations for its latest quarter.
The bank earned a fourth-quarter profit of $1.7 billion or $1.30 per share, up from $1.52 billion or $1.18 per share a year ago.
However, Scotiabank’s core earnings were $1.31 per share, compared with an average analyst estimate of $1.32 compiled by Thomson Reuters.
As a group, the Big 5 Canadian banks — Royal Bank, TD Bank, Scotiabank, Bank of Montreal and CIBC — earned $29.25 billion in their 2013 financial year, up from $27.81 billion in 2012.
But even as the earnings piled up, several of the banks trimmed staff in the fourth quarter.
The Bank of Montreal cut the equivalent of nearly 1,000 positions in the fourth quarter in a bid to reduce expenses, while CIBC’s number of full-time equivalent employees dipped by more than 450.
Royal Bank had about 1,100 fewer full-time equivalent employees compared with the third quarter.
“They are probably reading the writing on the wall as to what is going to be happening over the next several years,” Nakamoto said.
But despite the concerns, Nakamoto noted the Canadian banks have diversified operations in addition to retail banking, including insurance, wealth management and capital markets operations, that will help.
Driving the results at Scotiabank was strong growth at its Canadian banking operations, boosted by the acquisition of ING Direct Canada as well as improved margins, lower loan loss provisions and asset growth.
Return on equity for the quarter was 15.7 per cent, down from 16.4 per cent a year ago.
Scotiabank’s Canadian banking group earned $593 million for the quarter, up from $481 million a year ago, while its international operations earned $420 million for the quarter, up from $401 million in the fourth quarter of 2012.
The international operations also saw a $25-million after-tax gain on the sale of a non-strategic business in Peru this quarter.
Barclays analyst John Aiken noted Scotiabank’s international business saw its margins squeezed.
“We do not view the combined earnings negatively, and believe that there are several positives outside of the margin issues in international banking,” Aiken wrote in a note to clients.
The bank’s global wealth management business earned $318 million, up from $294 million a year ago on growth in its mutual fund and insurance business. Global banking and markets earned $336 million, down from $395 million.
For the full year ended Oct. 31, Scotiabank reported a profit of $5.15 per share, compared with a profit of $6.47 billion or $5.22 per share a year ago.
Revenue for the full year was $21.3 billion, including $5.4 billion in the fourth quarter. A year earlier, Scotiabank had $19.7 billion of revenue for fiscal 2012, including
$1.83 billion for the fourth quarter.