Canadian Banks Extend Earnings Beat Streak As Capital Markets Profit Jumps 27%

This article first appeared on GuruFocus.

Canadian banks just delivered another round of earnings beats, and the driver was familiar: stronger equity markets, active trading desks, and a dealmaking environment that still has enough momentum to support capital markets revenue. Royal Bank of Canada (NYSE:RY), Canadian Imperial Bank of Commerce (NYSE:CM), and Toronto-Dominion Bank (NYSE:TD) closed out the fiscal second-quarter reporting season with better-than-forecast results. The shareholder return story also stayed alive, with five of the country's six largest banks raising dividends, Royal Bank lifting its payout by 7%, and both Royal Bank and CIBC announcing new share buyback programs.

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The bigger investor takeaway is that capital markets did not fade the way some had feared after a very strong first quarter. Across the six largest Canadian banks, capital markets net income rose 27% from the same period last year to almost C$4.5 billion, or $3.2 billion. TD Chief Financial Officer Kelvin Tran described the environment as quite robust, helped by what he called the right level of volatility, where trading remains healthy and deals are still getting completed. Royal Bank also pointed to major energy-related transactions, including its advisory role on Arc Resources' more than C$20 billion sale to Shell and its joint lead bookrunner role on Fervo Energy's roughly $1.9 billion upsized IPO. RBC's capital markets unit, which generates roughly half of its revenue in the US, reported 17% year-over-year growth in corporate and investment banking revenue and 16% growth in global markets revenue.

Still, investors were selective, and the reaction was not uniformly positive. Royal Bank shares were down 0.8% and Toronto-Dominion slipped 0.3% shortly before 2 p.m. in Toronto, while CIBC fell more than 5% despite extending its earnings-beat streak and reporting a 40% surge in capital markets profit. TD posted adjusted earnings of C$2.38 per share, ahead of the C$2.26 analyst estimate, while adjusted net income rose 15% from a year earlier to C$4.17 billion. The bank set aside C$1 billion in provisions for potentially bad loans, below the C$1.07 billion analysts expected, and raised its quarterly dividend by 4 Canadian cents to C$1.12 per share. For TD, capital markets remain especially important in the US, where retail asset growth is still limited after its money-laundering settlement, while CEO Raymond Chun said the bank is making consistent progress on strengthening anti-money-laundering efforts.

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