Canada's TD outshone by CIBC as banks brace for headwinds

TORONTO (Reuters) - Toronto-Dominion Bank TD.TO and smaller rival CIBC CM.TO rounded off a week of earnings announcements by Canadian banks on Thursday, reporting record profits, but they face headwinds in 2018 due to stricter mortgage rules and concerns about the potential for house price declines.

FILE PHOTO: A Toronto-Dominion Bank (TD) sign is seen outside of a branch in Ottawa, Ontario, Canada on May 26, 2016. REUTERS/Chris Wattie/File Photo

Banks benefited from by a robust showing by the country’s domestic economy, which has grown at the fastest rate of the G7 group of industrialized nations and strong employment, which boosted credit growth.

But as banks prepare for the introduction of stricter rules on mortgage lending and new accounting rules which may increase earnings volatility, investors who are used to steady earnings growth and more stable share prices are preparing for a bumpy ride.

“There are a couple of headwinds coming up for the industry,” said Steve Belisle, senior portfolio manager at Manulife Asset Management. “Each one I believe is not game changing but I think, in aggregate, they are non-negligible.”

The Canadian banking sub-index .GSPTXBA has rallied 10 percent so far this year, nearly double the gains in the benchmark Canadian share index .GSPTSE.

On Thursday, TD, Canada's No. 2 bank, missed estimates with its fourth-quarter results due to lower revenue at its investment banking business, while smaller rival Canadian Imperial Bank of Commerce CM.TO (CIBC) posted forecast-busting numbers in the final quarter of the 2016/17 fiscal year.

Earlier in the week, Royal Bank of Canada RY.TO reported fourth-quarter results which beat market expectations while Bank of Nova Scotia's BNS.TO earnings fell short of forecasts.. BMO Financial Group BMO.TO, the No. 4 bank, is set release earnings on Dec. 5.

Under the new B-20 mortgage rules, borrowers taking out uninsured mortgages will be stress-tested to determine their ability to make repayments at a rate 200 basis points, or two percentage points, above their contracted mortgage.

CIBC said it expected a 10 to 12 percent reduction in the number of new mortgages it makes as a result of the new rules.

Canadian banks were also required by the regulator to adopt new accounting rules for their new fiscal years starting on Nov. 1 this year, which are expected to result in greater earnings volatility for banks going forward.

The new rules, known as IFRS 9, require banks to model credit loss risk based on expected rather than incurred losses.

“We would expect a little more earnings volatility,” TD’s Chief Financial Officer Riaz Ahmed said.

CIBC reported fourth-quarter results which beat analyst expectations, helped by strong growth in its Canadian commercial banking and wealth management businesses..

TD’s earnings per share, excluding one-off items, rose to C$1.36 from C$1.22 a year ago. Analysts had, on average, expected earnings of C$1.39, according to Thomson Reuters I/B/E/S data.

“Those headwinds might come to fruition which could change our outlook but so far if the economy performs the way it is now then I think we feel pretty good about 2018,” Ahmed said.

Editing by Bernadette Baum and Chizu Nomiyama