The Bank Towers were shown off Bay Street in Toronto’s financial district on Wednesday, June 16, 2010. The Canadian Press
Canada’s major banks are struggling to keep a cap on rising profits that could eat away at profits as they face pressure to continue rising in the midst of growing economic concerns about the impact of inflation and rising interest rates.
On Friday, the National Bank of Canada ended a solid second-quarter profit season for the country’s major banks with an 11 percent increase in profit for the year. The Montreal-based bank’s revenue grew 9% for the quarter ended April 30, with higher balances on loans and fees as consumers and businesses spend and borrow more.
But the bank’s costs rose 8 percent as it hired employees, raised salaries and invested in technology.
Rising costs leave banks with little room for error if revenue growth slows. Although banks made higher profits during most of the COVID-19 pandemic and performed better than many companies in other sectors, they are not immune to high inflation, which is raising prices.
Expenses rose 13 percent at the Canadian Imperial Bank of Commerce in the quarter from a year earlier and 5 percent at Toronto-Dominion Bank, which included a 9 percent increase in expenses at its Canadian retail banking unit.
Wages are a major force that increases costs, as tight labor markets, which keep many consumers financially stable, also create intense competition for talent. Banks’ investment in technology to improve the customer experience and automate routine tasks, as well as the resumption of travel and marketing costs when economies reopen, also make it difficult to limit costs.
The impact of inflation “is quite broad,” Hratch Panosian, CIBC’s chief financial officer, said in an interview. “You see impacts in different categories across the bank,” and the recent pressure on the bank’s spending is “slightly higher than we expected.”
The fight to retain employees adds hundreds of millions of dollars to bank spending, and the pressure is being felt everywhere, from executive and technology roles to staff in branches, call centers and back offices.
In mid-April, TD announced it would give most of its non-executive employees a 3 percent pay rise in July, and RBC soon followed suit by increasing the base salary of low-paid employees. Last week, the Bank of Montreal responded to these increases by promising a 3 percent pay rise for certain wage levels, according to CFO Typhoon Tuzun.
For TD, base salary increases will cost an additional $ 290 million a year, CFO Kelvin Tran said on Thursday.
“Wages and benefits will rise, inflation is high. There are certain costs that will naturally increase because of what is happening around us, “said Raj Viswanathan, chief financial officer of Bank of Nova Scotia, which saw a 3 percent increase in spending in the second quarter. He predicts that these costs will increase faster in the coming quarters, “but we have a number of levers that we use in this bank” to control them.
Mr Panosian said CIBC had “accelerated” some of its planned investments, “so we have already responded and have the opportunity to react for the rest of the year”.
For now, loan balances are growing at a steady pace, even as mortgage demand is expected to cool, credit card costs are rising, trade lending is strong and central bank interest rate increases are raising profit margins. “This is a good combination so you can master this,” said Ebrahim Punavala, an analyst at Bank of America Securities Inc., in an interview.
But if the economy shrinks as economists increasingly fear it could, “I don’t think … these banks have a lot of leverage to pull in terms of absolute spending cuts,” Mr Punavala said.
“It’s like a giant ship. “None of this happens overnight,” he said. “When you do them everywhere [salary] increases, there is very little room for cost reduction. “
Speaking to analysts on Friday, National Bank Finance Director Marie Chantal Gingras said the increase in costs was “linked to the growth of our business”. But she said the bank was looking for areas to reduce as it raised wages to keep pace in a “highly competitive environment” and increased spending in a number of areas, including automation, cybersecurity and regulatory compliance.
“The team is constantly working to identify and realize efficiency in our cost base, especially in an inflationary context,” she said.
The National Bank earned $ 893 million, or $ 2.55 per share, in the second quarter. That’s up from $ 801 million, or $ 2.25 a share, in the same period last year. On average, analysts expected earnings of $ 2.27 per share, according to Refinitiv.
The bank raised its quarterly dividend by 5 cents, or 6 percent, to 92 cents a share.
Profits in the banking sector rose in the second fiscal quarter, with four of the six major banks exceeding analysts’ expectations with convenient margins.
Royal Bank of Canada had the greatest success in cutting spending in the quarter, reporting an increase of just 1% on an annual basis. Still, the bank’s salaries rose 7 percent from a year earlier, “representing nearly 40 percent of the increase in our more controllable spending,” said CFO Nadine Ann. Higher professional fees and technology costs accounted for another 30 per cent of the increases, while marketing and travel accounted for 20 per cent, she said.
One of the reasons RBC managed to control spending in the second quarter was the weaker performance of the capital markets department, where revenue fell 14% from last year’s high. This provides “natural, built-in hedging” because it means the bank is handing out fewer bonuses to merchants and investment bankers, said CEO Dave McKay.
Over the past two years, rising capital market revenues have been a “big advantage for positive operating leverage,” which is the term in the industry for revenue ahead of costs, Mr Punavala said. But as fierce trading activity, IPOs and equity declines have declined this year – with quarterly capital gains falling 26% on RBC and 20% on BMO, for example – “you see this pain,” he said.
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