Royal Bank of Canada and Toronto-Dominion Bank reported solid earnings for the second quarter, helping to dial up concerns that the Canadian banking sector will face – or worse, facing serious challenges.
The two banks are Canada's largest lenders, and both beat their earnings expectations. The results should give investors some confidence after Imperial Bank of Canadian Trade reduced its profit forecast for the whole year on Wednesday and noted that it now expects small earnings growth to zero in the 2019 financial year.
TD, meanwhile, made a $ 3.2-billion record in the second quarter, 8.8 per cent more than the same period in 2018. After adjusting for one-time items, TD's profits were $ 1.75 per share , estimating a consensus estimate of $ 1.68 per share.
RBC made $ 3.2 billion, its second highest ever profit, and 5.6 per cent more than during the same period in 2018. After adjusting for one-time items, RBC made $ 2.23 per share, estimated a few analysts consensus $ 2.21 per division.
For both lenders, slower growth in their most important banking regions in Canada was offset by strength in other units, such as capital markets. Yet their performance on the market early on Thursday has been different. RBC shares fell by two per cent, while TD stock increased by 1.8 per cent.
Although the trading performance suggested that investors were encouraged by the earnings of TD, the bank's stock had been late. Earlier this year, TD reported a weak profit in the first quarter, including a rare loss in its wholesale banking arm, and mainly because its shares had underperformed competitive banks around 1.3 percentage points in the 2019 calendar.
The latest RBC earnings also beat estimates due to some possible one-time items, such as a reduced tax rate and a sharp increase in revenue from a fixed income trade, currency and commodity trading.
Although RBC shares are down on Thursday, they continue to increase by 10.4 per cent from the date of the year and have recovered all the land lost during the extensive market correction during the 2018 fall.
“While split earnings are mixed, we consider that the fundamental fundamentals of RBC are as strong as the merits of multiple premium valuations for peers,” Canaccord Genuity analyst Scott Chan wrote in a note to clients.
RBC's profits from Canadian banking rose by 2.8 per cent in the second quarter to $ 1.5 billion, indicating slower growth in the department producing around 45 per cent of total profits. Residential mortgage lending grew healthy by 5.2 per cent over the second quarter of 2018.
However, net income from wealth management has jumped 8.9 per cent year-on-year to $ 585-million and earnings from capital markets sacrificed 16.7 percent to $ 776-million, added by interest rate and credit trading.
Overall, the total cost growth of 7.9 per cent dragged on the bank's earnings. But RBC is clear that it has been deliberately spending while revenue is growing to prepare for the future.
“We've got ahead of a number of major programs,” said chief executive officer Dave McKay, on a conference call. Spending initiatives include building the bank's mobile banking capabilities and upgrading capital markets trading platforms. “We tied up a lot of the [expense] an increase in revenue from rising interest rates. ”
Looking ahead, RBC expects to slow its wear and tear to the low single digits because much of the heavy lifting is over.
TD also mentioned the quiet growth of his banking division in Canada, with a rise of 0.9 per cent. The department's expenses rose by 11 per cent while its revenue had climbed 8.1 per cent. Residential mortgage lending grew, but only 1.8 per cent during the second quarter of 2018.
TD.13 retail bank saw growth of 13.6 per cent in US dollars to US $ 753 million, while wholesale banking rebounded after a rough first quarter – although the profit of $ 221 million per unit was 17 per cent lower than the average; r the previous year.