Canada Banks Earnings Recap | Interest Income Soars to Record Highs Even After Rate Cuts

Canada's leading banks have recently wrapped up their earnings reports for the fourth quarter. The Bank of Canada's rate cuts have significantly reduced the financing costs and interest expenses for various banks. Several banks have seen their quarterly revenue reach new highs. Royal Bank of Canada and Canadian Imperial Bank of Commerce have exhibited notable robustness.

However, both BMO Bank and TD Bank are entrenched in the U.S. market. The growth in their EPS is partly due to a low base last year. TD Bank has a lower-than-expected outlook for 2025, impacted by ongoing anti-money laundering cases and rising costs. Meanwhile, BMO is expanding its presence in the U.S., notably through its $16.3 billion acquisition of Bank of the West. However, this expansion has also increased its exposure to weaker loan portfolios, resulting in a 51% decline in net income from its U.S. operations.

▶️ Net interest margins have all increased

Robust credit activity has continued to boost corporate interest income. The quarterly reports from the five banks show that the Bank of Canada's initiation of an easing cycle in June did not squeeze the banks' interest income; instead, it reduced the burden of banks' interest expenses. Among them, Bank of Montreal's NIM rose from 1.51% in Q3 to 1.70% in Q4. Royal Bank of Canada's interest expenses decreased by 4.7% sequentially, and its net interest margin expanded from 1.58% to 1.68%. Canadian Imperial Bank of Commerce also saw growth in its net interest margin, reflecting higher interest income from its credit card partnership with Costco.

▶️ Wealth management business grows rapidly

Active capital markets have led to the continuous expansion of the wealth management scale. RBC's wealth management business generated $969 million, a significant increase from $272 million, while its insurance operations saw earnings rise to $162 million from $97 million a year ago. CIBC reported that its Canadian commercial banking and wealth management operations earned $516 million, up from $490 million the previous year. BNS's global wealth management business achieved record annual earnings of $1.6 billion, marking a 10% increase from the previous year.

▶️ High-dividend banks continue to increase shareholder returns

Canadian banks continue to raise dividends for shareholders, with only BNS's Dividends per Share remaining the same as last year. Compared to Q1 2022, RY and BMO have the fastest dividend growth rates at 18% and 17%, respectively. TD and CM saw their dividends increase by 15% and 12%, respectively, while BNS only grew by 6%.

▶️ Banks have increased their provisions

As nonperforming loans continue to grow, various banks have increased their net charge-offs and provisions.

The only exception is CIBC, whose loan books held up better than analysts anticipated, largely due to an improved outlook for the bank's U.S. portfolio. Earlier this year, CIBC sold off a portion of its U.S. office loans.

In contrast, the deterioration in BMO's credit quality was very apparent. During a Thursday conference call, BMO's Chief Executive Officer Darryl White stated that the bank's credit performance "deteriorated more than we expected" in 2024.

Economic challenges, such as reduced immigration and rising protectionist threats, led banks to caution that conditions might deteriorate further before improving.

The uncertainty has prompted the company to adopt a more cautious approach to capital management. In the quarter, RBC increased its provisions for bad loans by 17 percent from a year ago to $840 million, predominantly in Canadian personal and commercial banking. Chief Risk Officer Graeme Hepworth indicated that total credit losses might reach their peak in the second half of next year as unemployment increases and the economy continues to weaken.

"Regarding credit, we remain cautious yet optimistic," stated Dave McKay, Chief Executive of Royal Bank of Canada.

"There's a bit of uncertainty about how we will navigate this situation, whether it resolves in the first or second half of the year, or even into early 2026."