TORONTO - Canada's five biggest banks posted a four per cent increase in profits during the most recent quarter, earning a combined $6.55 billion as they benefited from domestic consumer banking operations.
That's up from $6.28 billion a year ago.
But trouble could be ahead next year as tightened consumer lending habits start to erode growth at the banks.
Analysts gave a mixed response to the second-quarter earnings, which on the surface appeared stronger, but were also cluttered with a variety of other factors that clouded the fundamental results.
"There's clearly a deceleration of earnings growth," said Brad Smith, a senior financial services analyst at Stonecap Securities in an interview Thursday.
"These are not robust numbers."
Coming out on top was TD Bank (TSX:TD) which saw profits rise nearly 21 per cent to $1.69 billion, though chief executive Ed Clark warned that slowing loan growth and persistently low interest rates will impact growth in the rest of the year.
Loans are expected to be a crux for the banks in coming quarters as more Canadians hit the ceiling on what they can afford.
"Canadians are leveraged at unusually high levels, and they can get away with it because the cost of debt is low," said Peter Routledge, an analyst at National Bank Financial.
Numerous studies have found that household debt is on the rise. A quarterly report from TransUnion released Thursday suggests that consumers are on average $432 deeper into debt than they were a year ago, affected particularly by growth in car loans.
"Once you get to a certain level of debt, either banks will not be willing to lend, or consumers won't be willing to borrow," said Routledge.
"There's sort of an upper limit, and the Canadian households are approaching it."
Routledge said banks will also have to contend with more revenue volatility linked to instability in Europe.
Banks have been making changes with their internal operations that could help mitigate the brewing troubles. Bank of Montreal (TSX:BMO) and CIBC (TSX:CM), for example, were both tightening their expenses in the quarter.
Bank of Montreal (TSX:BMO) profits rose 27 per cent to nearly $1.03 billion, an increase of $215 million from a year ago, or $1.51 per share before adjustments.
Canadian Imperial Bank of Commerce earnings rose six per cent to $811 million as it earned $1.90 per diluted share. The results are up from $767 million or $1.80 a share in the same period last year.
Others received an earnings boost from recent acquisitions, such as Scotiabank (TSX:BNS) which saw its international operations benefit from the addition of Banco Colpatria in Colombia. The bank still reported that profit declined nearly 10 per cent to $1.46 billion, or $1.15 per diluted share, compared with $1.62 billion, or $1.39 per share a year earlier.
Royal Bank of Canada (TSX:RY) completed its own acquisition in the period, though it negatively affected profits. The bank said the acquisition of the remaining half of advisory firm RBC Dexia left a $202-million dent in earnings.
The country's biggest bank said Thursday that net income from continuing operations dropped to $1.56 billion, or $1.01 per share, down from $1.68 billion or $1.10 per share a year ago.
Those temporary impacts only glaze over the bigger picture, said Dan Werner, a Morningstar bank analyst based in Chicago.
"You've got to dig through and see what's really going on in the core numbers," he said.
"There are some things to point out here that foretell it's going to be a little tougher for Canadian banks to grow earnings like they did say two or three years ago."