August 28, 2008 / 3:23 PM / in 9 years

Canada banks surprise on upside, shares leap

TORONTO (Reuters) - Royal Bank of Canada RY.TO beat earnings forecasts and Toronto-Dominion Bank TD.TO surprised by raising its dividend, highlighting the contrasting banking environments of Canada and the United States.

The results on Thursday boosted the shares of Canada’s two biggest banks and helped to extend a banking sector rally spurred generally by lower-than-expected writedowns.

“Canadian banks don’t have to clean up from the popping of that (U.S. housing) bubble,” said Peter Routledge, a senior credit analyst at Moody’s in Toronto.

RBC Chief Executive Gord Nixon made it clear his bank would be careful about taking advantage of depressed U.S. bank valuations to make acquisitions.

“I would say that we look at the U.S. with a tremendous amount of caution given the current operating environment, but we also want to be positioned to take advantage of opportunities,” he said on a conference call.

Royal Bank in particular reported strong results in its domestic retail business.

Still, there are concerns that all the banks face headwinds as Canadian economic growth slows, and many analysts have been dropping 2009 earnings forecasts.

“You continue to see the domestic numbers look pretty good,” said Paul Harris, portfolio manager at Avenue Investment Management. “The key to owning a bank in this environment is to have one that has very good retail banking.”

Both RBC and TD reported a 10 percent drop in net earnings and increased their provisions for loan losses.

But RBC, Canada’s biggest bank, booked capital-markets writedowns that were about half the worst-case scenario painted by analysts. Excluding one-time items, RBC earned C$1.14 per share, ahead of the C$1.07 figure expected by analysts.

“This is clearly a very strong number,” said Darko Mihelic, an analyst at CIBC World Markets, who pointed to the 19 percent profit rise in Canadian retail banking as a key factor.

RBC, whose shares jumped 6 percent, earned C$1.26 billion ($1.2 billion) or 92 Canadian cents a share on a net basis after taking writedowns of C$498 million before tax.

Toronto-Dominion Bank TD.TO booked profit of C$997 million, or C$1.21 a share, on a net basis.

While its profit excluding items fell a few pennies short of analysts’ expectations, TD Bank surprised by raising its quarterly dividend 3 percent to 61 Canadian cents a share.

TD, whose shares were up 4.3 percent, was the only one of the six large Canadian banks to boost its payout.

“Results were ahead of our expectations in the U.S. and slightly ahead in Canada, offsetting a weak quarter at TD Securities,” RBC Capital Markets analyst Andre-Philippe Hardy said of TD Bank in a research note.

Earnings at TD’s U.S. personal and commercial banking unit, which now includes New Jersey-based Commerce Bancorp, more than doubled to C$244 million.

MEETING OR BEATING

Even the smallest of the Big Six banks, National Bank of Canada NA.TO, said net income jumped 18 percent, although profit grew a more modest 4 percent to C$253 million, or C$1.52 a share, excluding items.

Darren Dansereau, portfolio manager at investment firm QV Investors in Calgary, which owns National Bank shares, said the bank’s regional focus in Quebec was not a drawback this quarter.

“People always say National doesn’t have retail scale across the country, but if you do banking well in one area and you have the niche, you can make a lot of money,” he said.

All told, the three banks met or beat analysts’ expectations.

Earlier in the week, quarterly profits from Bank of Nova Scotia BNS.TO, Bank of Montreal BMO.TO and Canadian Imperial Bank of Commerce CM.TO fell short of market forecasts, although Scotiabank joined Royal in earning more than C$1 billion.

As the Canadian economy weakens, formations of impaired loans grow, banks tend to tighten their lending standards, and there is less demand for loans, noted Routledge of Moody‘s.

“How significant will this turn in the credit cycle be...that’s hard to predict,” Routledge said.

But Canadian banks have high capital levels to withstand it, he added.

Royal Bank of Canada shares were trading at C$47.98, up C$2.68 while TD Bank shares were at C$61.79, up C$2.45 and National Bank shares were at C$50.11, up C$1.61.

“Investors seem to have taken a positive view toward the banks, even though some of them have not met expectations,” said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier.

“It seems like it’s macabre reasoning that it could have been much worse.”

($1=$1.05 Canadian)

Reporting by Lynne Olver; Additional reporting by Leah Schnurr and Jennifer Kwan; editing by Ted Kerr

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