From Bay Street to Main Street
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From Bay Street to Main Street

With the public’s attention focused on enjoying the last of the warm summer air, the Big Six Canadian banks reported their third-quarter earnings last week. Typically disregarded for the summer memories replaying in Canadians’ minds, this quarter’s results hold some weight because Ontario’s economy is in limbo.
The past twelve months have shone a light on the province’s ailing economy: both manufacturing and financial services—two important industries—have seen a reduction in profits and number of jobs. Although the auto industry remains in doom, financial institutions have shown glimpses of strength over the past few months, providing some hope that the depressed economy might be turning around.
Bank of Montreal and Bank of Nova Scotia were first to report their earnings. Released on Tuesday, the final numbers weren’t very encouraging: both banks’ profits came in below expectations, not so good for the economy. Hindered by $484 million in write-offs on US loans that won’t be paid back, Bank of Montreal posted the weaker of the two results.
The mood was significantly more uplifting after Canadian Imperial Bank of Commerce announced its earnings on Wednesday. Despite an $885 million write-down, the markets reacted with glee because the loan loss provision was only half of what was expected. Typically, a write-down of this magnitude would instill fear among investors, but in the context of the credit crunch, the news was received positively and pushed CIBC’s stock 5% higher in one trading session.
Things only got better on Thursday. The final three banks (Royal Bank of Canada, Toronto-Dominion Bank, and National Bank of Canada) all released their results and both Royal and National Bank beat analysts’ expectations while TD increased its dividend (the quarterly amount paid out to shareholders). All three banks were up 5% on average at the market close on Thursday.
Although investors typically focus on each bank’s profit change over last year, or whether or not they beat expectations, it is important to analyze which operations are creating profits. For most of the six, the clear answer is retail banking. Considering that global capital markets are a mess, it isn’t surprising to see Canadian banks move into the retail space—the business services that cater to individuals. Unlike capital markets operations that serve large, institutional clients, the retail business is comprised of operating lines such as personal banking, personal mortgages, and personal loans.
This is good news for the economy. Critics may argue the profits from this sector merely demonstrate the banks are charging ordinary Canadians higher rates on loans and mortgages, but the higher interest is determined by the substantial risk inherent in lending money in these turbulent times. More importantly, retail profits will likely prompt the banks to devote extra resources to personal banking; in turn, individuals will gain easier access to loans and mortgages, helping to ignite consumer spending and home-building—the very crux of an economy.
Photo by Jason Michael from the Torontoist Flickr Pool.