The BoC Keeps It on the Down-Low

The Bank of Canada (BoC) held its target overnight interest rate at 0.25 percent today. Although the statement accompanying the rate announcement acknowledged improvement in economic conditions since the October Monetary Policy Report, the BoC also maintained its conditional commitment to keep the benchmark steady through the first half of 2010.

Whether the central bank moves before July of next year depends on what happens with inflation; the BoC sees inflation risk still “tilted slightly to the downside.”

The BoC softened its wording on the impact of a rising Canadian dollar. In its last rate statement the BoC warned that the strong loonie would “more than offset” emerging signs of economic recovery; today, the risk is that currency’s relative strength “could act as a significant further drag on growth.”

Both the BoC and the US Federal Reserve are holding benchmark overnight rates as low as they can possibly go. Major differences in Canada include the fact that its unemployment rate is lower and consumer debt isn’t as burdensome.

Canadian employers added five times more jobs than analysts expected in November; meanwhile, and the US Labor Dept reported last week that employers trimmed 11,000 jobs in November. While American employers are still cutting positions, this the fewest since the recession got underway in December 2007 and a hopeful sign that US demand for Canadian goods will pick up.

Relatively healthy Canadian consumers are taking advantage of record-low mortgage rates to buy new homes. Sales of existing houses rose 74 percent in October from the January low, with prices up 21 percent from a year ago to a record CAD341,079. Mark Carney is the only G20 central banker to set an end date for this period of cheap money, providing consumers a clear signal that this opportunity to attain cheap funding isn’t open-ended.

The CD Howe Institute, a Toronto-based think tank posited in a December 3 comment by its Monetary Policy Council that a “possible unintended effect” of Carney’s conditional commitment is “the buoyancy of mortgage lending, particularly variable-rate mortgages, and the housing market.”

Statistics Canada reported yesterday that the value of building permits rose 18 percent in October to CAD6.1 billion, mainly a result of gains in the value of non-residential permits and in construction intentions for single-family dwellings. This is the highest reading since September 2008.

The No. 1 priority for Carney and the BoC is to get–and keep–the economy growing again. Whatever bubbles inflate will be dealt with later.

Bank Earnings

Canada’s Big Five banks saw reasonable credit performance, gains in their investment-banking platforms and improvements in wealth management in the fiscal fourth quarter ended October 31.

Bank of Nova Scotia (TSX: BNS, NYSE: BNS) today became the last of Canada’s major banks to report earnings for the quarter ended October 31, its solid numbers providing a nice bookend for an encouraging reporting season for the group. As did its peers, Scotiabank benefited from higher trading fees and increased equity sales. Domestic banking was also strong, showing an 8 percent increase in net income.

Profit increased nearly three-fold as the investment banking results overcame lackluster growth in net interest income. But even better news lay deeper: Defaults in Scotiabank’s loan portfolio are leveling off. Provisions for credit losses–money set aside for loans that may not be repaid–were CAD420 million, up from CAD207 million a year ago but down from CAD554 million in the preceding quarter.

Bank of Montreal (TSX: BMO, NYSE: BMO) got things rolling last week by reporting a 16 percent increase in net income, driven its domestic consumer operations.

Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) handily exceeded analyst expectations, posting a 48 percent increase in quarterly profit.

CIBC’s cash earnings–a figure that excludes all one-time items–were CAD1.41 a share, compared with a consensus forecast of CAD1.33. The bank reported lower loan losses than most analysts expected. Another positive: No news from CIBC’s structured-credit operations, the source of earlier writedowns.

Canadian consumer lending and wealth management drove a 10 percent profit increase for Royal Bank of Canada (TSX: RY, NYSE: RY). Provisions for bad loans increased 43 percent to CAD883 million. Personal loans, residential mortgages and deposits all increased. Royal Bank’s international operations, including US-focused RBC Bank, recorded a sixth straight quarterly loss on increased loan-loss provisions.

Toronto-Dominion Bank (TSX: TD, NYSE: TD) beat expectations with its CAD1.46 per share in cash earnings, but its future depends heavily on what happens in the US. TD management’s outlook was more cautious than those of other banks because of its US exposure.

The Big Five’s generally solid results underscore the findings of a recent assessment by Standard & Poor’s of global banks’ risk-adjusted capital (RAC), a more demanding, more precise measure of a bank’s capital base than the commonly referenced Tier 1 capital.

According to S&P, Toronto-Dominion is in the top quintile, while Bank of Nova Scotia, Royal Bank and Bank of Montreal are in the second quintile.

Strong Loonie = Strong Hockey

The relative strength of the loonie is an unequivocal positive if you’re a fan of Canada-based National Hockey League teams.