TD and CIBC beat expectations

So much for wholesale banking being the hobble on Canadian bank earnings in the fourth quarter.

The first two Canadian banks to report, Toronto-Dominion Bank (TD-T) and Canadian Imperial Bank of Commerce (CM-T), showed strong results from their wholesale operations, including surprisingly resilient trading revenue.

Both banks beat consensus estimates, countering expectations that rough capital markets would hamper earnings.

However, for all the good news from trading, the core business of lending money to individuals and businesses was a grind for both banks. The banks lent out more money, but made less on every dollar they doled out.

CIBC chief executive officer Gerald McCaughey said "external forces" that are pressuring earnings like low interest rates will remain for some time

THE OVERALL RESULTS:

TD, Canada's second largest bank by assets, made $1.57 billion, or $1.69 a share, during the quarter. That compared to profit of $994 million, or $1.07 a share, during the same period last year. Revenue rose 13 percent to $5.7 billion.

CIBC said net income climbed to $794 million, or $1.90 a share, from $500 million, or $1.17 a share. Revenue was little changed from the year-ago period. The bank benefited as its income-tax expense plunged to $249 million from $742 million.

THE BREAKDOWN:

In wholesale banking, where trading results are reported, TD recorded a 33-percent increase in net income to $288 million, on an adjusted basis.

The bank said the increase was due mostly to improved foreign exchange trading and equity trading income, which offset a big drop in credit and interest-rate trading revenue.

Trading income from foreign exchange rose to $134 million, from $112 million, while equity trading income climbed to $121 million, from $109 million. While neither of those were huge increases, they helped take the sting off of what was supposed to be a dismal quarter for trading income in the wholesale division.

Over all, trading-related income fell to $286 million from $383 million last year, driven mostly by a steep drop in interest rate and credit trading income, which evaporated to $31 million from $162 million.

That trend is expected across the sector this quarter, as upheaval stemming from the European sovereign debt crisis played havoc with the credit markets.

"Trading conditions remained challenging, particularly in fixed income and credit markets," Bob Dorrance, group head of wholesale banking at TD said in a statement.

"However, good performance in other core businesses including equities, foreign exchange and investment banking was augmented by significant gains in our investment portfolio, making for an overall strong quarter."

He noted that the outlook in several key international markets remains "concerning."

CIBC said net income in its wholesale business surged to $172 million in the fourth-quarter, up from $145 million in the third-quarter and a loss of $56 million in the fourth-quarter of the prior year.

Capital markets revenue, which includes trading, rose to $251 million from $233 million a year ago, and was unchanged from the third quarter. CIBC attributed some of the strength to foreign exchange trading.

Corporate banking and investment banking revenue, which includes lending to large companies and fees for advising them on transactions, soared to $334 million from $146 million a year earlier, and from $232 million in the third quarter.

LENDING:

Competition for loans continued to take its toll on the banking sector this quarter. The banks doled out more money, but made less on every dollar they lent.

TD grew its loans to $305.8 billion, an increase of just over 12 percent compared to a year ago, which was fuelled mostly by residential mortgages and business and government lending.

However, interest income didn't quite keep pace, rising 10 percent in the past year, and staying basically flat from the third-quarter.

Net-interest margins, the difference between what the banks earn on loan interest and pay out on deposits, shrunk to 2.28 percent in the fourth quarter, from 2.39 percent in the previous quarter, and 2.31 percent a year ago.

These figures suggest that banks are competing more fiercely for each dollar of profit they make on loans. While TD grew its loan book in the quarter, profits and net interest margins were slimmer. This trend has been seen across the sector for the past few quarters as low interest rates eat into bank profits and the lenders try to make up for it through loan volumes.

TD had $86.8 billion of mortgages on its books in the quarter, compared to $71.5 billion a year ago. Meanwhile, business and government loans increased to $93.2 billion, from $83.4 billion a year ago.

CIBC's total loan book expanded to $185 billion from $176.9 billion, a 4.5 percent increase. Most of the growth came from mortgages.

However, net interest income actually declined to $1.6 billion from $1.65 billion a year earlier.