05/28/2015 12:43 EDT | Updated 05/28/2016 05:59 EDT

Hot capital markets boost second-quarter results for Canada's big banks

TORONTO - Strong returns from their capital markets businesses helped offset slowing growth in the domestic banking operations at most of the country's top lenders in the second quarter.

While debt-laden Canadian consumers have become hesitant to increase borrowing, causing a lull in loan growth, activity on the capital markets has been heating up. That has allowed the banks to generate substantial revenues through advisory and underwriting fees.

Bank of Nova Scotia analyst Sumit Malhotra says companies raised $21.6 billion on the Toronto Stock Exchange between February and April — almost double the quarterly average of $11.6 billion seen over the last two years.

In a note to clients, Malhotra said wholesale banking operations — which include investment banking, corporate lending and trading — have been outperforming the banks' Canadian retail banking segments since the start of 2012.

"Though the wholesale versus retail trade-off is not ideal, this is less of an issue for investors as long as consumer credit quality trends hold up well," Malhotra said.

Analysts tend to view revenues from the capital markets segment as more volatile and less sustainable than those derived from personal and commercial banking.

Canadian Imperial Bank of Commerce (TSX:CM) says profits nearly tripled in the second quarter, with its wholesale banking and wealth management divisions leading the way.

The bank reported second-quarter net income of $911 million, or $2.25 per share, on Thursday — up from $306 million or 73 cents a year ago, when the bank logged a $543-million impairment charge related to its Caribbean operations.

Adjusted net income, which filters out one-time items, was $2.28 per share, beating analyst expectations by five cents per share.

Royal Bank (TSX:RY), which also reported its quarterly results on Thursday, saw profits jump 14 per cent to $2.5 billion, or $1.68 per share, from $2.2 billion or $1.47 per share in the second quarter of last year. Adjusted net income was $1.63 per share — three cents higher than analysts had predicted.

Barclays analyst John Aiken said the bank's capital markets results were "exceptional," with trading revenues up 13 per cent from the first quarter while advisory fees soared 25 per cent higher.

"As we have seen with Royal's peers this quarter, strong capital markets results were able to offset challenges facing the retail banking platform," Aiken said in a note to clients.

Meanwhile, TD Bank Group (TSX:TD) saw its net profits decline by seven per cent to $1.86 billion, or 97 cents per share, from $1.99 billion or $1.04 a share a year ago.

But after filtering out one-time items — including a $337 million restructuring charge to trim its operations — adjusted earnings were up nearly five per cent to $2.2 billion, or $1.14 a per share, beating analyst expectations by three cents.

During the quarter, the bank decided to close 24 existing branches, cancelled a number of planned branch locations and thinned out its management ranks as it looked to make itself leaner and more agile.

"The restructuring is part of our ongoing focus on adapting to the current environment while building for the future," TD's chief executive Bharat Masrani told investors and analysts during a conference call Thursday.

"Our operating environment remains challenging. Lower rates, a slowing Canadian economy, mixed recovery signals from the U.S., continued expectations for low oil prices and regulatory and legislative pressures in both the U.S. and Canada will continue to result in slower revenue growth."

TD was the second of the big five Canadian banks to log a restructuring charge. On Wednesday, the Bank of Montreal (TSX:BMO) reported it took a $106-million hit for slimming down some of its operations.

Scotiabank will report its quarterly results Friday.

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