TD Bank and CIBC posted quarterly results on Thursday, and as was the case with Canada's other major lenders — RBC, Scotiabank and BMO — both banks showed a big increase in profits partly because they had to set aside far less money to cover bad loans.
TD reported that it earned a profit of just over $3.5 billion in the three months up to the end of July. That's a 58 per cent increase from the $2.2 billion it earned in the same period a year ago.
Most of the bank's business divisions improved their financial performance, from the core Canadian retail bank business, to commercial banking, investment banking, its U.S. division and insurance. But one of the big factor's in the bank's profit increase was an improvement in its loan portfolio.
A year ago, the bank set aside $951 million to cover loans it feared may go bad — a banking metric known as provisions for credit losses. But this year, however, that figure fell to just $100 million.
"TD's strong performance in the third quarter was supported by solid revenue growth in our Canadian and U.S. Retail businesses as economic activity and employment levels continued to improve on both sides of the border," CEO Bharat Masrani said in a release.
CIBC profit up, too
It was a similar story at CIBC, where profit increased to just over $1.7 billion for the quarter. That's up from $1.1 billion a year ago.
And CIBC's loan loss provisions completely changed direction, as well. A year ago, CIBC had set aside $525 million to cover bad loans. This quarter, however, the bank took $99 million from its reserves and added it to the positive side of the ledger.
"This quarter's record top-line revenue and earnings per share underscore the breadth and quality of the growth we have across all of our key business units, as we continue to successfully navigate an uncertain environment by staying focused on our clients and on the wellbeing of our team," CEO Victor Dodig said.
TD and CIBC were the last of Canada's five big banks to post quarterly results, and on the whole, the numbers show the big banks collectively earned more than $14 billion in profits last quarter. This time last year, they earned a little over $9 billion.
Profits are booming at Canada's big banks
While strong and profitable banks are broadly good for the economy, the subject of exactly how much profit is good versus excessive came up on the federal election campaign trail this week.
The Liberals have proposed a tax on bank profits above $1 billion, saying the move will bring in $2.5 billion a year to help pay for affordable housing and other initiatives.
Dodig made passing reference to the proposal on a call with analysts on Thursday to discuss the bank's quarterly results.
"Banks have always been in the crosshairs, but what you want is a healthy banking system," Dodig said.
"A healthy banking system helps the economy grow."
Dodig said he would not comment on specific election promises but wanted to remind investors of the work banks did during the early days of the outbreak, when they distributed pandemic stimulus funds and deferred on loans for clients. He also noted that most Canadians benefit either directly or indirectly from the dividends and economic growth of the banks.
Pros and cons to taxing bank profits
Paul Gulberg, an analyst with Bloomberg Intelligence who covers the big banks, says the move would "sour banks'
relationship with the government" and cost them about three per cent of their earnings per share. He doubts it will happen, even if the party proposing the tax gets elected.
"Similar to calls for oil and bank company tax surcharges in the U.S. and Europe, such initiatives have generally not been adopted and implemented," he said.
But Duff Conacher, co-ordinator of watchdog group Democracy Watch, says the idea of a tax on excess bank profits is an idea that's long overdue. Countries such as Australia and England already have a version of what the Liberals are proposing, he said. It's one of the suggestions that more than 120,000 Canadians have signed their name in support of on Democracy Watch's petition and letter-writing campaign to better regulate Canada's big lenders.
"They control 90 per cent of essentially every banking product and service in Canada," he said in a recent interview. "In 2020, four of them were among the 50 most profitable in the world."
Conacher says all parties have been far too cozy with Canada's big banks over the years, "but the big question is why? Banks can't go anywhere. They can't say they'll shut down the plant and move to a low cost jurisdiction — they have to be here to operate and take our money."
Conacher would like to see the big banks compelled to disclose more about their lending data and approval rates, along with more precise breakdowns of profitability by business segment, because on the whole, he said customers are getting "gouged."
"The rates go down very slowly and snap up higher than they need to very quickly," he said.