RBC’s gains in Canadian banking bode well for domestic peers

Bloomberg

Royal Bank of Canada is taking care of business at home.
Royal Bank, the first Canadian lender to report fiscal third-quarter results, saw a jump in profit from its domestic banking operations amid signs that the nation’s economy is accelerating. An improving outlook prompted Canada’s central bank to raise interest rates last month, and economists predict at least one more hike this year. The country is forecast to lead the Group of Seven in growth in 2017, data compiled by Bloomberg show.
That’s good for the domestic operations of Canadian lenders, as Royal Bank illustrated in its results for the quarter ended July 31. Earnings from domestic banking rose 5.1 percent to $1.07 billion, while net interest income for the business hit a record and could improve further when the central bank’s rate hike kicks in.
“This is a strong signal to the market that Canadian banking is at least steady, and potentially there’s an opportunity for the banks to grow,” Jim Shanahan, an Edward Jones analyst, said in a phone interview. “There’s a lot of reason to be optimistic about what the banks could do in the fourth quarter and the next year based on what we’ve seen here this morning.”
Royal Bank shares climbed 1.4 percent to C$93.26 in Toronto, the best performance in the eight-company S&P/TSX Commercial Banks Index. The stock has gained 2.7 percent this year.
Bank of Canada’s July 12 increase, which was preceded a month earlier by soaring government bond yields, may help ease pressure on lenders that have seen low rates squeeze margins since the 2008 financial crisis. The central bank raised its overnight rate 25 basis points to 0.75 percent.
Despite higher earnings in personal and commercial banking and a 25 percent increase in wealth-management profit, Royal Bank showed it’s not immune to the trading slowdown that’s affected US rivals.
Trading revenue fell 15 percent to C$835 million in the quarter, led by declines in fixed income, currency and commodities, the Toronto-based firm said. That’s the second straight quarter of year-over-year declines at the bank, which runs the biggest trading operation among Canadian lenders.
Royal Bank cited “lower fixed-income trading results on reduced market volatility” as one reason for the 4 percent drop in earnings at its RBC Capital Markets business. Trading revenue was the lowest since the fourth quarter of 2016, mirroring the falloff at many Wall Street firms. Large U.S. banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp. last month reported that fixed-income trading revenue declined in the second quarter from a year earlier as reduced market volatility kept many investors on the sidelines.
Canadian banks have also sought to mitigate the impact of tax changes from the country’s 2015 federal budget.

CIBC mortgage balances rise even as Canada home prices slide
Bloomberg

Canadian Imperial Bank of Commerce’s brisk pace of mortgage growth may soon start to slow. Average mortgage balances at the country’s fifth-largest lender by assets soared 13 percent in fiscal third quarter, the biggest year-over-year increase since 2007. But that may be coming to an end, as CIBC executives told investors they expect the rate to fall back in line with competitors.
CIBC has been an outlier among Canada’s largest lenders for almost two years on the rate at which its home-loan portfolio has expanded.
The Toronto-based bank has pointed to a decision to beef up its mobile sales force to about 1,200 advisers after exiting its FirstLine mortgage broker business in 2012 as a reason for the jump.
“We don’t expect this level of growth carrying on indefinitely,” Chief Financial Officer Kevin Glass said.
“We have stabilized our mortgage adviser sales force, so over time what you will see is a stabilisation and then certainly a decline in the growth rate.”

Canadian builder Aecon hires bank advisers to explore sale
Bloomberg

Canadian construction company Aecon Group Inc. confirmed as its shares skyrocketed that it has hired advisers to explore a potential sale.
Aecon, which helped build Toronto’s CN Tower, is working with Toronto-Dominion Bank and Bank of Montreal on the sales process.
Trading of the company’s shares was temporarily halted Friday after Bloomberg News reported the potential sale. After rising more than 26 percent, its shares were up 24 percent to C$17.79 in Toronto, giving the company a market value of more than $800 million. The company could attract interest from Chinese bidders, said people familiar with the matter who asked not to be identified because it’s private.
“Any transaction would be intended to create shareholder value and enhance the company’s capabilities and growth potential,” Aecon said. “There can be no assurance that this process will result in any agreement or that a transaction will be consummated.” The company could be worth about C$24.96 a share in a takeover based on recent transactions in the sector, an analyst said.