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Canada's RBC, CIBC beat profit estimates; TD misses on higher loan provisions

FILE PHOTO: FILE PHOTO: A Royal Bank of Canada logo is seen on Bay Street in the heart of the financial district in Toronto

By Nivedita Balu and Niket Nishant

(Reuters) -Two of Canada's big six banks beat expectations for quarterly earnings on Thursday, as Royal Bank of Canada benefited from a rebound in dealmaking and Canadian Imperial Bank of Commerce made smaller-than-expected loan provisions.

At RBC, the country's largest lender that has been cutting costs through layoffs and other measures, the boost to its capital markets unit offset a surge in provisions for credit losses (PCLs) to C$720 million in the fourth quarter from C$381 million a year earlier.

"Excluding severance charges, it was a clean beat," National Bank analyst Gabriel Dechaine said.

Shares of RBC rose 2.5% and those of CIBC climbed 4%.

A rise in PCLs at TD Bank contributed to an earnings miss along with weakness in its U.S. business.

The higher bad loan provisions continue a trend this year as banks gird themselves for a potential surge in defaults.

TD said it would be challenging to meet its medium-term adjusted earnings growth target range of 7%-10% in the new fiscal year.

"The environment is fluid. It is quite complex with PCL normalization and that's why it's challenging to meet those targets for 2024," TD CFO Kelvin Tran said in an interview, adding that the bank was still confident it would get there owing to its "diversified business."

CIBC CEO Victor Dodig also noted that the economic backdrop would likely "remain fluid and present new challenges in some areas of the economy."

TD said it was aiming to reduce its workforce by 3%, or more than 3,000 jobs, as it cuts costs.

It reported adjusted earnings of C$1.83 per share, 7 Canadian cents shy of estimates. Shares of the country's second-biggest lender were down 1.6%.

The Canadian economy has been teetering on the brink of a recession after a run of aggressive central bank rate hikes.

Analysts have warned that rising deposit costs could squeeze profitability, as lenders pay heftier interest rates on customer deposits, a key source of capital. At the same time, delinquency rates are keenly watched as mortgages come up for renewal starting next year at elevated rates.

RBC CEO Dave McKay noted that high interest rates were having a more immediate impact on the cost of living in Canada relative to the United States partly due to the difference in the duration of mortgage terms.

"We believe central banks have reached the end of the tightening cycle and will pivot to rate cuts in 2024," he told analysts.

RBC reported adjusted earnings of C$2.78 per share, comfortably beating expectations of C$2.62, according to LSEG data. The beat was also driven by a low tax rate.

In a report filed with regulators last month, RBC's U.S. unit City National Bank said the Canadian lender had injected about $2.95 billion into it this year.

CIBC also beat profit expectations as it set aside smaller-than-expected loan provisions and is slashing costs through a 5% reduction in its workforce, or about 2,400 jobs.

The lender, Canada's fifth biggest, reported adjusted earnings of C$1.57 per share, compared with expectations of C$1.53.

The number of job cuts, a rarity in the Canadian banking space, are on top of RBC's roughly 1,800, about 2,700 at Bank Nova Scotia and a few hundreds at Bank of Montreal.

Scotiabank on Tuesday missed profit estimates as it set aside C$1.26 billion in loan loss provisions.

($1 = 1.3603 Canadian dollars)

(Reporting by Niket Nishant in Bengaluru and Nivedita Balu in Toronto; Additional reporting by Arasu Kannagi Basil; Editing by Shinjini Ganguli, Kirsten Donovan and Mark Porter)