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Economy

Banks top profit estimates as lower provisions outweigh FX hit

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Three of Canada‘s top lenders reported better-than-expected quarterly profits on Thursday, as signs of an economic recovery helped them reverse bad debt provisions and their capital markets and wealth management units boomed.

Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD) and Canadian Imperial Bank of Commerce (CIBC) have largely avoided major increases in loan impairments and expectations for strong economic growth look likely to keep a lid on them.

But their results masked some challenges, including flat net interest margins, little to no commercial loan growth and the impact of a strong Canadian dollar.

Particularly at TD, earnings excluding the impact of provisions and taxes fell 16.8%, compared with increases of 14% and 11% at CIBC and RBC respectively.

The impact of the strong Canadian dollar and higher payments to retail partners in its U.S. credit card business weighed on earnings, TD Chief Financial Officer Riaz Ahmed said in an interview.

TD shares fell 0.7% from Wednesday’s record close to C$88.19 in morning trading in Toronto. Royal Bank shares rose 1.05% to C$125.70, and CIBC gained 2.7% to C$140.83, both all-time highs. The Toronto stock benchmark added 0.3%.

“At first look we see TD’s Q2 EPS beat as lower quality relative to the bank’s peers,” Credit Suisse analyst Mike Rizvanovic wrote in a note.

In contrast, RBC had a “solid quarter overall” and CIBC had “strength across each operating segment” although the latter’s margin compression in domestic lending was a modest concern, he said.

While RBC, Canada‘s biggest bank, also felt some currency hit in translating earnings from its U.S. City National business, it was offset to some degree by the impact on expenses, executives said on an analyst call.

RBC released C$260 million ($216 million) from its loan-loss reserves in the second quarter, compared with provisions of C$2.1 billion a year earlier. CIBC reported an almost 98% fall in provisions, while TD recovered C$373 million of funds set aside to cover bad loans.

Analysts had expected average core earnings per share for Canada‘s top six lenders to more than double in the three months through April from a year earlier when they set aside nearly C$11 billion to cover potential bad loans.

CIBC and RBC also benefited from a surge in deal-making and trading activity that boosted their capital markets businesses, with the latter reporting record revenue in investment banking.

TD’s wholesale banking revenue fell 8% from a year earlier on lower trading revenues, although non-interest income was boosted 6% by wealth and banking fees.

RBC posted adjusted earnings per share of C$2.79, compared with a Refinitiv IBES estimate of C$2.48 a share. CIBC’s net income excluding one-off items was C$3.59, beating estimates of $3.01 a share. TD, Canada‘s second-largest lender, posted adjusted net earnings of C$2.04, exceeding estimates of C$1.76 per share.

($1 = 1.2094 Canadian dollars)

 

(Reporting by Noor Zainab Hussain and Niket Nishant in Bengaluru and Nichola Saminather in Toronto. Editing by Aditya Soni and Mark Potter)

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Economy

Canadian first quarter industry capacity use rises to 81.7%

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Canadian industries ran at 81.7% of capacity in the first quarter of 2021, up from a upwardly revised 79.7% in the fourth quarter of 2020, Statistic Canada said on Friday.

The increase in the first quarter was driven by gains in construction and in mining, quarrying, and oil and gas extraction.

Following are the rates in percent:

Q1 2021 Q4 2020 (rev) Q4 2020 (prev)

Cap. utilization 81.7 79.7 79.2

Manufacturing 76.5 76.7 76.2

NOTE: Economists surveyed by Reuters had forecast a first quarter rate of 80.6% capacity utilization.

(Reporting by Steve Scherer, editing by Dale Smith (steve.scherer@tr.com))

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UK, Canada agreed to redouble efforts for trade deal

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British Prime Minister Boris Johnson and Canadian Prime Minister Justin Trudeau agreed on Friday to redouble their efforts to secure a trade agreement as soon as possible to unlock such a deal’s “huge opportunities”.

“The leaders agreed a comprehensive Free Trade Agreement between the UK and Canada would unlock huge opportunities for both of our countries. They agreed to redouble their efforts to secure an FTA (free trade agreement) as soon as possible,” Downing Street spokesperson said in a statement.

“They discussed a number of foreign policy issues including China and Iran.”

 

(Reporting by Guy Faulconbridge, writing by Elizabeth Piper)

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Greater pricing power to help Canadian exporters withstand loonie surge

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A stronger Canadian dollar is usually seen hurting exporters, but the nature of the global economic recovery could help firms pass on their higher costs from the currency to customers, leaving exporters in less pain than in previous cycles.

Exports account for nearly one-third of Canada‘s gross domestic product, compared with about 12% for the United States, making Canada‘s economy more sensitive to a stronger currency, with the loonie trading near a six-year high versus the U.S. dollar.

But exporters could remain more competitive than usual after the COVID-19 pandemic led to a surge in the amount of money available for consumer spending, bolstered by government support measures. A global shortage of goods, due to supply chain disruptions, could also help.

“The appreciation that we are seeing in the currency now is less of an issue than in most other appreciations that we have seen,” said Peter Hall, chief economist at Export Development Canada.

“There are not enough goods and services available to satisfy the demands of the marketplace at the moment. And in that case there is probably pricing power,” Hall added.

The prices that Canadian manufacturers charge for their products increased at a record pace in May, while activity climbed for the 11th straight month, data from IHS Markit Canada showed last week.

Canada‘s major exports include autos, oil and other commodities. With commodity prices soaring, the Canadian dollar has been the top performing Group of 10 currency this year, advancing 5% against the U.S. dollar.

It hit a six-year high near 1.20 per greenback, or 83.33 cents U.S., last week. The Bank of Canada has said that further appreciation could weigh on the economy.

The loonie traded close to parity for much of the 2007 to 2013 period, contributing to a slow recovery for Canada‘s exports from the global financial crisis.

“What (business) was left behind after that period of an overvalued currency was relatively strong,” said Doug Porter, chief economist at BMO Capital Markets.

That reduces the risk of a “hollowing out” of the sector during the current episode of currency strength, Porter said.

At Magna International Inc, a major Canadian producer of auto parts, global diversification of its operations helps protect against currency strength.

“Movements in the Canadian dollar have become relatively less impactful to our overall business,” a company spokesperson said in an email to Reuters. “Increased global economic activity, and in particular global light vehicle production is a more important factor to our outlook.”

For now, the greater concern for manufacturers could be the reduced and more costly supply of inputs, such as semiconductor microchips, as well as the lengthy closure of the U.S. border.

“The challenge we have faced as an industry is the movement of personnel,” said Brian Kingston, chief executive of the Canadian Vehicle Manufacturers’ Association (CVMA). “If a piece of equipment on the line goes down, you may need to bring in someone from Michigan.”

For some industries, those logistical issues and the stronger Canadian dollar could be trivial compared to the jump in commodity prices.

“Under normal circumstances, a rising Canadian dollar would hinder the competitiveness of Canadian exports, but the way ag (agriculture) markets have risen overall, it’s a moot point,” said Lorne Boundy, merchandiser for Winnipeg-based crop handler Paterson Grain.

 

(Reporting by Fergal Smith; additional reporting by Allison Lampert in Montreal, Rod Nickel in Winnipeg and Shreyasee Raj in Bengaluru; Editing by Denny Thomas and Jonathan Oatis and Kirsten Donovan)

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