TORONTO (Reuters) - Quarterly results from Canadian Imperial Bank of Commerce (CM.TO) and Toronto-Dominion Bank (TD.TO) gave Canadian bank earnings season a strong start on Thursday, but a grim outlook for 2012 left investors lukewarm on their shares.
Both TD and CIBC handily topped analysts' earnings forecasts for the August-October quarter thanks largely to surprisingly strong investment banking and trading revenues. Analysts said the results suggest Canada's other big banks may also report robust profits.
"With the both of them doing very well on trading, it actually does bode well for others," said John Aiken, an analyst at Barclays Capital. "That being said, we wouldn't necessarily believe that it's going to ignite anybody's (stock) valuation because the market will discount this with the current pessimism."
That pessimism stems from dour predictions for 2012 that reflect already high consumer indebtedness and concerns that Europe's sovereign debt crisis could balloon into a freeze-up in lending reminiscent of 2008.
"Looking forward, the external environment remains very uncertain," CIBC Chief Executive Gerry McCaughey said on a conference call. "Interest rates are expected to remain low and growth rates in consumer credit are expected to slow down slightly."
CIBC's shares fell 1.3 percent to C$72.00, while TD was down 2.2 percent at C$71.90. However, following sharp gains on Wednesday, the stocks are still up on the week, and the overall market was slightly lower too.
"The outlook that they gave going forward wasn't really a rosy picture for either bank," said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.
While the banks' outlook may be grim, they ended fiscal 2011 with blockbuster profits despite the largely unfavorable backdrop of uncertain markets and narrow loan margins.
TD earned record net income of C$1.57 billion, or C$1.69 a share, up from C$994 million, or C$1.07 a share, in the year-before quarter. Excluding items, the bank earned C$1.77 a share, ahead of analysts' estimates of C$1.53.
For the year, Canada's No. 2 bank earned C$5.9 billion.
Profit at TD's Canadian retail bank rose 15 percent to C$580 million due to higher mortgage lending, insurance and business lending. Wholesale banking income more than doubled to C$288 million on higher stock and foreign exchange trading, and lower loan-loss provisions.
TD Chief Executive Ed Clark said the bank was sticking with its goal of annual earnings growth of 7-10 percent, but acknowledged this could take some work, given uncertainty about how Europe's debt issues will ultimately be resolved.
"Clearly there is some tail risk of a major political failure," he said on a conference call. "The most likely outcome currently seems to be a series of muddling along adjustments... The likely net effect will be slower growth and possibly a mild recession."
However, he said the bank is seeing signs of a recovery in the United States, where TD runs a branch bank that now rivals the size of its Canadian network.
CIBC, Canada's No. 5 bank, earned C$794 million ($778 million), or C$1.89 a share, in the quarter, up from a year-before profit of C$500 million, or C$1.17 a share.
Excluding one-time items, the bank earned C$1.87 a share, topping analysts' estimates of C$1.81.
Capital markets income, which has been unpredictable all year, rebounded from a year-earlier loss to a better-than-expected C$172 million due to strong trading fees.
Retail lending profit, the bank's core business, rose 15 percent to C$580 million as stronger loan volumes more than offset narrower interest margins.
McCaughey said the bank has been adjusting its loan portfolio to focus on wider margin products even at the expense of sales volumes.
For instance, it is giving up market share on mortgages sold through brokers, which typically have very narrow margins, in favor of branch-sold mortgages, which are more profitable.
Editing by Peter Galloway and Janet Guttsman