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March 5, 2022

TD Bank Group wrapped the earnings stretch Thursday when it reported a first-quarter profit of $3.7 billion, up from nearly $3.3 billion a year earlier

Canada’s Big Six banks all topped expectations for the first quarter as solid economic growth and volatile markets helped push up bottom lines.

TD Bank Group wrapped the earnings stretch Thursday when it reported a first-quarter profit of $3.7 billion, up from nearly $3.3 billion a year earlier that was boosted by the strength of its Canadian and U.S. retail banking operations.

“Canadian retail had a strong quarter, increased customer activity supported record revenue performance in the personal and commercial bank,” said Kelvin Tran, chief financial officer at TD in an interview.

The higher earnings follow on stronger-than-expected results from RBC, Scotiabank, CIBC, BMO, and National Bank that were broadly boosted in part by high trading revenue as well as personal and commercial loan growth.

The earnings beats come as Canada’s economy grew by 6.7 per cent in the fourth quarter and Statistics Canada estimates January growth at 0.2 per cent, despite Omicron related shutdowns.

Banks have also been boosted by a hot housing market fuelled by low borrowing rates, though that started to change this week with the Bank of Canada raising its benchmark rate by 25 basis points for the first time since 2018.

But banks are also poised to reap higher net interest margins if the central bank continues to raise rates. CIBC says a 100 basis point increase across all rates would boost net interest income by about $450 million, while BMO says it would see about a $540 million increase.

The timeline of those rate increases are less certain as the Bank of Canada said when raising rates that Russia’s invasion of Ukraine was a “major new source of uncertainty.”

The central bank warned that oil and other commodity prices have spiked, which will add to inflation, while negative impacts on confidence and supply chains could weigh on global growth.

On Thursday, bank governor Tiff Macklem said in a speech that the bank has to act to lower inflation, which is running at a three-decade high and is also hotter than the bank expected six months ago.

The uncertainty around the pace of rate increases, inflation, supply chains and geopolitical tension has helped push up trading revenue at Canadian banks. TD benefited somewhat less from this trend than other banks, but the bank rolled out a new mobile trading app in the quarter and did well in other areas, said Tran.

“Our results are broader than just trading. The retail bank did really well. We have strong volume growth on both the loans and deposit side in Canada and customer activities are strong.”

On an adjusted basis, TD says it earned $2.08 per diluted share, up from an adjusted profit of $1.83 per diluted share a year ago. Analysts on average had expected an adjusted profit of $2.04 per share, according to financial markets data firm Refinitiv.

Barclays analyst John Aiken said that while the bank beat expectations, results were arguably not as strong as peers, and not just in capital markets.

“The margin compression in domestic retail and weaker loan growth than some of its peers will likely garner some negative attention,” he said in a note.

Scotiabank analyst Meny Grauman said the bank performed well in expense management, but was weaker in most metrics for its personal and commercial banking in Canada.

“While it is hard to call TD’s performance a bad result, the magnitude of the beat was certainly the most modest we have seen across the Big 6 this earnings season.”

On Monday TD announced it was expanding in the southeastern U.S. with a deal to buy First Horizon Corp. for US$13.4 billion.

The bank is paying for the deal with its significant cash holdings that are well above regulated requirements.

Grauman noted that TD has been trading at a premium thanks to its excess capital, and the bank’s greater exposure to central bank rate expectations, but that both drivers have now slackened.

“In the wake of the First Horizon acquisition and curve flattening both of those drivers are becoming headwinds to some extent.”

This report by The Canadian Press was first published March 3, 2022.

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