Canadian Banks May Restructure Operations To Aid 2020 Earnings

Most of the Canadian banks witnessed dismal earnings growth in fiscal 2019 mainly due to an increase in provisions and weak investment banking performance. In order to drive earnings growth in fiscal 2020, banks like The Toronto-Dominion Bank (TSX:TD) and Canadian Imperial Bank of Commerce (TSX:CM) recently said in a conference that they might undertake restructuring efforts this year and hence incur restructuring charges. Notably, fiscal 2020 is already expected to be a tough year.

Bharat Masrani, CEO of Toronto-Dominion said, “In the phase we're in, you should expect that this becomes more regular until... the level of innovation slows down dramatically. Jobs within TD are changing quite dramatically... That requires us to restructure certain parts of our bank.”

The CEO of Canadian Imperial Bank of Commerce, Victor Dodig, said, “If there is an opportunity to take a charge that makes sense, that we can clearly communicate to our investors, we may consider that.”

In the last fiscal year, Canadian Imperial Bank of Commerce witnessed a contraction in its home loan balances, which contributed to the softness in the company’s personal and small business division. Per Dodig, this resulted in “a pause on earnings growth” last year.

Thus, in order to drive growth this year, the bank said that it will take a more “diversified” approach in originating mortgages rather than focusing on the greater Toronto and Vancouver areas.

Notably, banks are projected to witness 3-4% earnings growth for fiscal 2020, almost similar to that of fiscal 2019.

Most of the banks expect 2-3% adjusted expense growth for fiscal 2020, down from 5% in fiscal 2019.

While banks like Toronto-Dominion and Canadian Imperial Bank of Commerce are open to restructuring in fiscal 2020 to drive earnings growth, others like Royal Bank of Canada (NYSE:RY) and Bank of Montreal (TSX:BMO) are not willing to take any restructuring charges.

Dave McKay, the CEO of Royal Bank of Canada, said in the conference that it does not plan to take any restructuring charge in fiscal 2020. The company will rather focus on eliminating unproductive activities and not employees.

McKay stated, “If we were to take a restructuring charge, we would have taken it in Q4.”

As part of its efforts to reduce workforce by 5% i.e. slash nearly 2,300 jobs, Bank of Montreal has already taken a pre-tax restructuring charge of C$484 million in the fourth quarter of fiscal 2019.

The company’s CEO, Darryl White, said, “We don't intend to pull this lever again. We have to make sure that 5% of the work goes away... we're doing that through technology, through rewiring the organization... and it's completely different from anything we've done in the past.”

Of the four banks mentioned, Bank of Montreal currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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