Mathew Ingram On BMO/TDBank of Montreal and Toronto-Dominion Bank played a popular game with their latest quarterly reports, a game you might call "Look what I have in this hand . . . ." In other words, they focused (naturally enough) on their most recent results and how great they did compared with last year. And both did quite well indeed; TD Bank's profit, for example, jumped by 24 per cent in the fourth quarter and BMO's rose by almost 10 per cent.
Shares of the two banks fell, however, along with those of the banks that have yet to report their quarterly results. Why? Because the market is more focused on what's in their other hand: namely, slowing profit growth. In many ways, the last year or so has been the best of times for Canada's banks, for a number of reasons, but those days are coming to a end. And now the big question is: what can the banks come up with for an encore?
The Bank of Montreal set the tone for the latest earnings parade. BMO said that its profit climbed in the fourth quarter to $546-million from $493-million in the same quarter a year earlier. Profit climbed across all its lines of business, but a reduction in loan losses did the bulk of the heavy lifting. BMO had said that it would take credit-loss provisions of $100-million for the fourth quarter, but only wound up taking $67-million. In the same quarter last year it had loan-loss provisions of $95-million.
The picture for the full year made the point even more obvious: BMO made a record profit of $2.28-billion in 2004, up by more than a third from the previous year's profit of $1.74-billion. The bulk of that boost came from a reduction in the amount of loan losses it booked. Instead of the $455-million the bank recorded as a loss in 2003 (or rather as a provision against a future loss) it recovered more than $100-million -- a swing of more than $550-million. That accounted for about 70 per cent of its profit gain.
TD was a similar story. For the full year, the bank had a profit of $2.23-billion -- twice as much as it made in the previous year, when it had a profit of $989-million. TD had a number of restructuring charges and one-time writedowns that impaired its financial results in 2003, but apart from that one of the main engines for its profit growth this year was a $572-million turnaround in loan losses. In 2003, TD booked losses of $186-million, and this year it recovered $386-million.
Those kinds of one-time boosts are nice to have, especially when the memory of all the losses from the tech-bubble era is still fresh in investors' minds. But BMO can't count on getting that kind of windfall this year, nor can the other major banks. And that has left the market wondering where the growth is going to come from, with interest rates creeping up and loan losses about as low as they can get. As bank analyst Donald Chu of Standard & Poor's said, "The tough question is, where are they going to get the juice from?"
TD at least had something else to drive its business, and that was retail banking, its core strength. In the latest quarter, the bank's profit rose by 24 per cent to $595-million from $480-million in the same period a year earlier. A big chunk of that was the result of a 19-per-cent increase in income from its retail unit. Unfortunately, TD said that investors shouldn't get their hopes up for a similar performance in the future, warning that such growth was not likely to be sustainable.
TD chief executive officer Ed Clark said that he is expecting profit growth for the bank of between 7 and 10 per cent, while the Bank of Montreal says it is looking to boost its profit this year by between 3 and 8 per cent. No one would quarrel with the upper end of those targets (assuming the banks can get there), but BMO's low-end estimate of 3 per cent isn't going to set any hearts racing in the investment world. And even TD's estimate is based on loan losses remaining at a low level.
Perhaps the biggest problem is that this year looks better in large part because it is being compared with last year, when there were all kinds of loan losses, writeoffs and other events that made results look bad. The corollary is that compared with a good year -- such as the one that just ended -- next year isn't going to look as exciting.
And we all know what can happen when banks try to make their results more exciting, don't we? Things like Enron and Global Crossing, questionable acquisitions, or the always popular real estate spending binge. It's no wonder bank investors are a little nervous about the future.
Mathew Ingram writes analysis and commentary for globeandmail.com
mingram@globeandmail.ca