Canada’s big banks are battling to keep a lid on rising costs that could eat into profits as they face pressure to keep growing revenue in the midst of mounting economic unease over the impact of inflation and rising interest rates.
On Friday, National Bank of Canada wrapped up a solid second-quarter earnings season for the country’s major banks with an 11-per-cent increase in profit, year over year. The Montreal-based bank’s revenue was up 9 per cent for the quarter ended April 30, with higher loan balances and fees as consumers and businesses spend and borrow more.
But the bank’s expenses were up 8 per cent as it hired staff, increased salaries and invested in technology.
Surging expenses leave banks with little margin for error if revenue growth slows. Though banks have churned out higher profits through most of the COVID-19 pandemic, and fared better than many companies in other sectors, they are not immune to the high inflation driving up prices.
Expenses spiked by 13 per cent at Canadian Imperial Bank of Commerce in the quarter, compared with a year earlier, and by 5 per cent at Toronto-Dominion Bank, which included a 9-per-cent increase in costs in its Canadian retail banking unit.
Salaries are a major force pushing up expenses, as tight labour markets that have kept many consumers financially stable also create intense competition for talent. Investments by banks in technology to improve customer experiences and automate routine tasks, as well as resurgent travel and marketing spending as economies reopen, have also made it harder to restrain spending.
The impact from inflation “is fairly broad,” Hratch Panossian, CIBC’s chief financial officer, said in an interview. “You’re seeing impacts across various categories across the bank,” and the recent pressure that has put on the bank’s costs has “been a little bit higher than what we expected.”
The fight to retain employees is adding hundreds of millions of dollars to banks’ expenses, and the pressure is felt everywhere, from executive and technology roles to staff in branches, call centres and back offices.
In mid-April, TD announced it will give most of its non-executive employees a 3-per-cent pay raise in July, and RBC soon followed suit, boosting base pay for low-salaried staff. Last week, Bank of Montreal matched those raises, promising a 3-per-cent pay increase for certain salary tiers, according to CFO Tayfun Tuzun.
For TD, the base salary increases will cost an extra $290-million a year, CFO Kelvin Tran said Thursday.
“Salaries and benefits will go up, inflation is high. There are certain expenses that will go up naturally because of what’s happening around us,” said Raj Viswanathan, CFO of Bank of Nova Scotia, which reported a 3-per-cent rise in second-quarter costs. He predicted those costs will increase more rapidly in the coming quarters, “but we have a number of levers that we use in this bank” to control them.
Mr. Panossian said CIBC has “paced” some of its planned investments, “so we’ve already been reacting and we have the ability to react through the rest of the year.”
For now, loan balances are increasing at healthy rates even as demand for mortgages is expected to cool, credit-card spending is picking up, commercial lending is strong and central bank interest-rate increases are boosting profit margins on loans. “That is a good combination to be able to absorb this,” Ebrahim Poonawala, an analyst at Bank of America Securities Inc., said in an interview.
But if the economy falls into a downturn, as economists increasingly fear it could, “I don’t think … these banks have a lot of levers to pull in terms of absolute cost cuts,” Mr. Poonawala said.
“These are like giant ships. … None of this happens overnight,” he said. “When you’re doing these across-the-board [salary] increases, there is very little room to flex lower on expenses.”
On a call with analysts on Friday, National Bank CFO Marie Chantal Gingras said cost increases are “tied to our business growth.” But she said the bank is looking for areas to cut back as it has raised salaries to keep pace in “a highly competitive environment” and has boosted spending in an array of areas that include automation, cybersecurity and regulatory compliance.
“The team constantly works on identifying and realizing efficiencies in our expense base, especially in an inflationary context,” she said.
National Bank earned $893-million, or $2.55 a share, in the second quarter. That compared to $801-million, or $2.25 a share, in the same period last year. On average, analysts were expecting earnings of $2.27 a share, according to Refinitiv.
The bank raised its quarterly dividend by 5 cents, or 6 per cent, to 92 cents a share.
Profits rose across the banking sector in the fiscal second quarter, with four of six major banks beating analysts’ expectations by comfortable margins.
Royal Bank of Canada had the most success at containing costs in the quarter, reporting an increase of just 1 per cent, year over year. Yet the bank’s salaries rose 7 per cent from a year earlier, “representing nearly 40 per cent of the increase in our more controllable costs,” CFO Nadine Ahn said. Higher professional fees and technology costs accounted for another 30 per cent of increases, and marketing and travel for 20 per cent, she said.
One reason RBC was able to rein in second-quarter costs was the weaker performance of its capital markets division, where revenue fell 14 per cent from high levels last year. That provides a “natural, built-in hedge” because it means the bank is doling out less bonus pay to traders and investment bankers, chief executive officer Dave McKay said.
For the past two years, soaring capital markets revenues were “a big boon for positive operating leverage,” which is the industry term for revenue outpacing expenses, Mr. Poonawala said. But as frenzied activity in trading, IPOs and equity issuances has fallen off this year – with quarterly profit from capital markets falling 26 per cent at RBC and 20 per cent at BMO, for example – “you see that pain,” he said.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.