Canada’s biggest banks are facing a storm of challenges, with a slowdown in consumer spending and a dearth of public listings pushing some big lenders to make hefty job cuts as their profitability falters.
The decision by Bank of Montreal (BMO), Canada’s fourth-largest bank, to slash its global workforce by 5 per cent highlights the growing problems facing the country’s financial services sector.
BMO this week announced a pre-tax charge of C$484m ($360m) for the three months to the end of October, pushing net income down 30 per cent year on year to just under C$1.2bn. The charge mostly related to severance payments across the group as the bank seeks to streamline costs.
Chief executive Darryl White said the restructuring was undertaken after “serious consideration” and that “there will be ongoing accountability throughout the organization for the decisions that have been made”.
Based on BMO’s most recent headcount of about 45,500 employees, the cuts translate into a loss of close to 2,300 jobs, the sharpest reduction by any Canadian bank since the early 2000s and the deepest at BMO in more than three decades. The bank expects the cuts to save it C$375m annually by 2021.
Royal Bank of Canada, the country’s largest lender, reported slightly lower net income of C$3.21bn in the same period compared with C$3.25bn a year earlier, partly due to severance payments although no details were given about the number of jobs cut.
“The next couple of years are likely to be challenging,” said Dave McKay, RBC’s chief executive, in a conference call with analysts.
Investors anticipate that more job losses will follow. “This isn’t an environment where the banks need to hire more employees, in fact it’s the opposite,” said Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management, a Toronto-headquartered fund group. “We’re looking at slower revenue and earnings growth going forward from what we’re used to and you’re going to see the banks get leaner.”
Canadian banks are grappling with multiple issues, chief among them a reckoning for consumers, whose spending buoyed the country’s economy for years but who accumulated a mountain of debt in the process.
The number of consumer insolvencies has climbed to the highest level since the financial crisis a decade ago. Just over 135,000 Canadians declared bankruptcy or entered an insolvency agreement in the year to the end of October, according to the federal Office of the Superintendent of Bankruptcy, up almost 11 per cent from the month before.
Central bank data show that year-on-year growth in household credit was 3.8 per cent in September, only slightly above a 40-year low reached in April.
Rising loan loss provisions — money banks put aside to cover bad loans — were also a factor in the earnings drop at RBC. They rose 17 per cent from the previous quarter to C$499m in the three months to the end of October.
On Thursday, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce rounded out the series of fourth-quarter results with similarly lacklustre numbers. Net income at TD slumped 3.5 per cent to $2.9bn as the bank reported provisions for loan losses of $891m as well as booking a $154m restructuring charge. At CIBC net income fell 6 per cent to C$1.2bn, also as a result of having to set aside more money for potential credit losses.
Meanwhile, Bank of Nova Scotia, which reported results last week, said net income in the three months to the end of October grew just 1 per cent to $2.31bn. Chief executive Brian Porter declared the bank to be “downturn ready”.
BMO’s restructuring charge was its second in less than a year, which surprised analysts.
“The only positive thing to say about a C$484m charge this quarter is that management asserts it is the last one. Good riddance,” said Robert Sedran, an analyst at CIBC Capital Markets in a note.
Though Mr White has vowed there will be no further charges, the problems facing the bank and its peers remain.
Canadian capital markets were at a standstill, depriving the investment banking arms of financial groups of profits, said Mr Schwartz.
There have been just three initial public offerings on the Toronto Stock Exchange this year. A proposed flotation by garbage-hauler GFL Environmental, which sought to raise $2.1bn in what would have been Canada’s biggest new offering in 20 years, was scrapped last month after it failed to find sufficient investor demand.
One bright spot for lenders is the Bank of Canada’s refusal so far to join other major central banks in cutting rates. On Wednesday, Canada’s central bank left its benchmark interest rate unchanged at 1.75 per cent, citing “nascent evidence that the global economy is stabilising”.
A series of rate increases in 2017 and 2018 boosted the banks’ bottom lines thanks to gains in net interest income, or the spread between the higher rates banks charge borrowers and the lower rates they pay to depositors.
The struggles at Canada’s biggest banks come after years of warnings by several high-profile short sellers that credit losses will eventually hurt margins.
Earlier this year Steve Eisman, the billionaire portfolio manager made famous by Michael Lewis’s book The Big Short, renewed his bet against big Canadian banks. “Canada has not had a credit cycle in a few decades,” he said. “I just think, psychologically, they’re extremely ill-prepared for how much their capital ratios could go down if there’s just a simple normalization of credit.”
Yet investors who have shorted Canadian bank stocks have faced unrelenting losses. Even including a recent pullback, the S&P/TSX Bank index, a benchmark for the sector, is up 11 per cent this year.
“The banks have proven time and again that any American person who comes up with a short thesis clearly doesn’t understand how Canadian banks operate,” said Mr Schwartz.
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