Six Canadian Banks earn almost $35 billion over last fiscal year

- In a year that has seen a weak economy, slumping development in the energy sector and consumers cautious and debt-ridden, five of the six main Canadian banks had fiscal year earnings better than last year with Scotibank being the single exception.

Three of the six banks also increased their dividends. Total earnings of the six for the fiscal year was almost $35 billion. The Royal Bank was the top earner with $10 billion in profit compared to $9 billion last year.

One of the ways the banks increased their profits was by curbing expenses. This often involves trimming staff and running the operations with fewer workers. TD cut 1,594 jobs this year. Scotiabank dropped 1,140 staff since last July.but this did not increase the profits for this year which dropped to $7.21 billion from$7.30 billion last year. Royal Bank also cut 528 full time jobs but did it mostly by not replacing retirees rather than laying off existing staff.

Some of the increase in profits has nothing to do with the Canadian economy but rather that some Canadian banks have large U.S. operations, and with the low Canadian dollar, U.S. earnings are worth more in Canadian dollars. Some Canadian banks have expanded to such a degree into the U.S. that in the case of TD, it has more branches in the U.S. than Canada. TD had the second highest earnings with $8.02 billion this year as compared to $7.88 last year.

Loan volumes have been rising and deposits growing. The banks also saved money by not passing along the full half percentage point in the loan rate that the Bank of Canada introduced earlier this year. The banks lowered their rate by only 0.30 percent, keeping the other 0.20 per cent for themselves or 40 percent of the total drop in the rate. What many consumers no doubt noticed is bank fees are continuing to increase as well.

Still, banks face problems in the west. particularly in Alberta where there have been many layoffs. The Royal Bank has added eight energy sector companies to its watch list. Equifax, the credit monitoring agency, says loan delinquencies were rising in every province with a large energy component. The economic outlook for 2016 is not that robust and forecasts have been trending downward,

The banks also face pressure to introduce new digital technology to compete with competition from giants such as Apple and Google. Janice Fukakusa, CFO of RBC, said: "We're continuing to invest in our digital channels … and also to invest in automating and simplifying our processes." David Beattie, a bank analyst at Moody's Investor Services, said"They're getting to the point where they're really doing some substantive changes to the way they run their businesses,Digitization is doing that anyway, but the pressure of low interest rates and spread compression and low revenue growth is just making it all that more critical."

The Royal Bank(RBC), with the largest profits, showed an increase in profits of 11,3 percent from last year. In the fourth quarter of this year ending on October 31, it earned $2.59 billion, also up by 11 percent from 2014. The RBC profit per common share was $1.74 in the fourth quarter above estimates by analysts. For the full year it was $6.73. The stock pays a dividend of 79 cents per share, an amount unchanged. Dave McKay, president and CEO of RBC, said: "We had record earnings of $10 billion in 2015, reflecting the strength of our diversified business model and our ability to execute our growth strategy in a changing environment," RBC operations in the U.S. and the Caribbean were profitable this year whereas last year they suffered losses. Not surprisingly there are signs that all will not be well in Alberta. Mark Hughes, risk officer for the RBC, said:"We've noticed a slight — and I would stress the word slight — upward trend in auto and credit card delinquencies in Alberta and while they haven't translated into writeoffs, we are monitoring the performances of these portfolios,"

The Toronto-Dominion Bank(TD) saw its profits increase by 5.3 percent in the fourth quarter to $1.84 billion even though it had heavy restructuring costs. The bank claims its Canadian retail operations experienced growth in loans, deposits, and insurance earnings. At the same time, credit performance was also strong. TD's U.S. banking operations had a net income of $486 million, which was 14 percent above that of last year. In part this was due to the weak loonie. The TD president and CEO, Bharat Masrani, said; "Results for the year reflect good earnings performance from all businesses, driven by good organic growth, strong credit quality, favourable currency translation and positive operating leverage."

Although CIBC profits showed a drop in profits for the fourth quarter, it also reduced its workforce — but by just 124 positions in the fourth quarter. For the entire fiscal year ending Oct. 31, CIBC performed better than in 2014. The bank had $3.59 billion of net income and $7.92 billion of revenue, up from $3.22 billion of net income and $7.5 billion of revenue last year. Victor Dudig, CEO and president said:"In 2015, all three of our strategic business units delivered strong performance,Looking to 2016, I am confident that our client-focused strategy and our investment in innovation and process improvements will add long-term value for our shareholders."

CIBC increased that dividend, paid quarterly, from $1.13 to $1.15.

OECD reduces GDP growth forecast for Canada

The Organization for Economic Co-operation and Development has lowered its forecast for growth in Canada and also globally as new investment remains sluggish, unemployment high, and consumers reluctant to spend.

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The OECD gave the global economy just a B-minus in its report on the global economy released just today. Although OECD chief economist Catherine Mann predicted a global growth rate of 3.8 per cent by 2016 this would still be below the average growth rate before the 2008 financial crisis. The OECD represents 34 developed countries.

The growth rate for Canada this year has been downgraded from 2.2 per cent just this March to 1.5 per cent now. Last November the OECD forecast Canadian growth at 2.5 per cent. With this weaker growth rate, the OECD now predicts that the Bank of Canada will not raise interest rates until early next year rather than the middle of this year as it had earlier predicted. The high personal debt of Canadians could depress consumption and also lead to a decline in purchase of houses resulting in lower investment in the housing area.

While the lower Canadian dollar should stimulate exports, the slowdown in Chinese and U.S. economic growth may lead to lower demand. If oil prices slump again, the situation would be even worse. If oil prices rise and U.S. and Chinese growth accelerates, this will have a positive effect on Canadian growth. The performance of the U.S. economy in the first quarter of this year was dismal as it contracted at an annual rate of 0.7 per cent.

Douglas Porter chief economist at the Bank of Montreal(BMO) remarked that growth was so sluggish people still talked of a "recovery" when we have been expanding for some time since the Great Recession. He said: “I guess technically we are long into the ’expansion’ phase and really shouldn’t be calling it a ’recovery’ any more. However, I suspect most people still feel like we’re still recovering from the financial crisis and its aftermath.”Porter noted unemployment in Canada remained near 7 per cent and many young people could not find jobs. Statistics Canada reported the Canadian economy contracted at an annual rate of 0.6 per cent last quarter. The BMO cut its forecast for growth this year to 1.5 percent, matching that of the OECD. With the exception of recession years. this would be the slowest rate of Canadian growth in 30 years. Porter said in a report: “At the start of 2015, the overarching view on the Canadian growth outlook was that it faced one big negative (lower oil prices), and one big positive (stronger U.S. growth), which were supposed to roughly offset each other. Fully 40 per cent into the year and we have certainly seen the negative at work (business investment plunged 15.5 per cent in Q1), while we are still waiting for the positive to kick in (export volumes have been down over the past two quarters).”

The Royal Bank of Canada(RBC) was slightly more optimistic on Canadian economic growth compared to the OECD and BMO. RBC predicted that the Canadian economy will grow by 1.8 per cent this year and 2.6 per cent next year. However, the bank predicted that investment would be weak particularly in the energy area. Energy companies are slated to slash spending by almost 30 per cent this year. Other sectors may take up some of the slack with exports on the rise due to the weaker Canadian dollar making Canadian goods cheaper in many markets, particularly the U.S.

The Organization for Economic Cooperation and Development reduces growth rate projection for Canada

The Organization for Economic Cooperation and Development(OECD) has cuts it growth rate prediction for Canada in both this year and also in 2016.

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In its economic assessment released today, March 18, the OECD said: “Overall, the near-term outlook remains for moderate, rather than rapid, world GDP growth. [But] real investment remains sluggish and labour is not yet fully engaged. Lower oil prices will boost global demand and have created conditions for many central banks to lower interest rates.”The Canadian central bank has already lowered interest rates in the hope of stimulating economic activity. Prior to the drastic drop in oil prices the OECD had predicted that Canada would gradually begin raising interest rates around the middle of this year. The opposite has happened, as in January, Stephen Poloz, the governor of the Bank of Canada, lowered interest rates from 1 percent to 0.75 percent.

The report claimed that overall the effect of lower oil prices should be positive:“Lower oil prices both raise the real incomes of households and reduce costs for firms, and should therefore be beneficial for global growth, notwithstanding the loss of real income for oil producers. The fall in energy prices also puts downward pressure on consumer prices. Many central banks have responded to the shock by cutting interest rates or signaled a more accommodative policy stance.”This is little comfort for provinces such as Alberta whose economy is very much dependent upon oil production and royalty revenues. Alberta's construction industry is predicted to face three years of job losses.

The OECD predicts that Canadian GDP will increase just 2.2 percent in 2015, down from a predicted 2.6 per cent gain last November. In 2016 growth is also down at 2.1 percent compared to an earlier estimate of 2.4 percent. US growth has remained the same at 3.1 percent in 2015 and 3.0 percent in 2016, outpacing Canadian growth.

The Royal Bank of Canada(RBC) earlier had also reduced its growth forecast for Canada. For 2015 RBC predicted growth in GDP as 2.4 percent down from a December forecast of 2.7 percent. However, Craig Wright, RBC chief economist said: “We see the hit to the economy from a pullback in oil and gas activity as targeted and regional, and unlikely to derail Canada’s economy this year.” The slump in oil prices wlll hurt growth prospects for oil-producing provinces such as Alberta and to a lesser extent Saskatchewan, as well as Newfoundland and Labrador. On the other hand, the lower oil prices will be positive for Ontario,, British Columbia, and Quebec, that are oil consumers. The lower Canadian dollar will also help exports along with the growth of the US economy.

Canadian personal debt is over 160 percent of disposable income late in 2014

Canadians' disposable income is not growing as fast as their borrowing. Canadian personal debt grew to 163.3 percent of disposable income in the fourth quarter of 2014.

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With interest at historic lows and the cheapest mortgages in years, many Canadians are assuming larger debt amounts. Last month five-year conventional mortgage rates fell 4.74 percent, the lowest since records started in 1975. The Bank of Canada cut the interest rate even further in January as the drop in oil prices threatened parts of the economy in areas such as Alberta. New homes prices fell 0.1 percent in January as builders try to entice new home buyers.

In January this year according to a Royal Bank study, Canadian household debt grew by 4.6 percent. This is close to the fastest growth in two years. Household debt in Canada was $1.82 trillion in January greater than Canadian GDP which on an annualized basis was below this at $1.65 trillion in January. Much of the debt comes from mortgages that grew 6.3 percent last year. While debt is rising, some forms of expensive debts are being cut back. While Credit card debt did rise by 2.7 percent last year, that is less than the increase in other forms of debt. In January of this year Credit Card debt fell 22 per cent from the month before. Of course, December is Xmas month.

However, in the last three months, the amount of personal loans declined by 16 percent as well. Putting the situation in the lingo of finance, Royal Bank of Canada(RBC) economist Laura Cooper writes:“There is a risk that highly accommodative financial conditions could exacerbate household imbalances as evidenced by the recent strengthening in mortgage accumulation,”As worries accumulate about the long-term health of the economy, businesses are turning to short-term rather than long-term loans. Short-term loans were up 12 percent this year in January compared to last year.

Analysts worry that Canada's personal debt is now outpacing that of most developed countries. The McKinsey Global Institute claims that Canada and Australia, together with a number of countries in northern Europe " now have larger household debt burdens than existed in the US or the UK at the peak of the credit bubble" according to their new analysis. The Institute analysis looked at 47 different countries and identified seven with"potential vulnerabilities" including Canada, Australia, Sweden and the Netherlands. The report was based upon data from the second quarter of last year. Since then oil prices have crashed putting Canada's economy even more at risk.

Susan Lund, of a McKinsey partner in Washington, said: “What the financial crisis showed us is that when you have rising real-estate prices and rising household debt, it can be a deadly mix. You have to manage each carefully,”The Bank of Canada rate cut is a tempting policy designed to spur growth but it makes monitoring of debt levels even more crucial. It might be wise to tighten rules for lending if mortgage debt increases too much. Mortgage amounts have increased as house prices in Canada have risen 89 percent in Canada between 2000 and 2007. Data for Canada may be somewhat warped by the fact that debt of unincorporated businesses in Canada is counted as personal debt whereas in some countries it counts as corporate debt.

Canada Mortgage and Housing Corp (CMHC), Canada's federal housing agency, has also issued a warning to the finance ministry back in 2014 about high household debt levels and very high house price levels in some markets. Blacklock's Reporter said the CMHC made these comments in a confidential memo. Blacklock claimed the memo said when it called for a "soft landing adjustment" for the housing market that has been rising quickly because of lower interest rates: "We are, however, concerned about reduced household flexibility resulting from elevated debt levels as well as diversion of capital into residential housing investments, Likewise, elevated prices in some urban markets further compound affordability concerns."The CMHC would not comment on the memorandum.