Canada's big banks counting on U.S.

One thing that's clear from the earnings reports released by three of Canada's major banks is that they are not only benefiting handsomely from their big U.S. operations, but they're also counting on a steadily improving U.S. economy to offset Canadians' slowing appetite for mortgages and other debt.

Bank of Montreal , for example, booked a 27-per cent increase in profit during the second quarter in no small part because of its U.S. expansion, mainly through its acquisition of Wisconsin-based Marshall & Ilsley Corp. last summer.

When it bought the U.S. bank, BMO wrote off or wrote down large quantities of distressed loans that it judged would probably never be paid back, but BMO officials say a surprising amount are now being recovered. If that's truly a sign of a healthier lending and borrowing climate in the United States, then that bodes well for BMO going forward, since its prognosis for the Canadian economy is a bit tepid.

"Households are spending more cautiously in the face of elevated debt levels and higher gasoline prices," BMO said Wednesday in its report. "Housing market activity has softened in most regions and mortgage growth is showing tentative signs of slowing."

Moreover, BMO said, the Canadian dollar is "expected to generally trade above parity with the U.S. dollar for several years." At the same time, though, the bank said "improved U.S. demand should support exports in 2013."

Royal Bank of Canada , which reported Thursday morning, is particularly bullish on the United States going forward, which is boosting its optimism about the domestic economy.

In its report, RBC said it forecasts Canadian growth of 2.6 per cent this year, up from its previous call of 2.3 per cent, "reflecting stronger consumer and business confidence driven by higher expected U.S. economic activity." RBC's analysis incorporates the Bank of Canada starting to raise interest rates before the end of 2012, earlier than many forecasters have come to expect amid signs of slower consumer spending.

And Toronto-Dominion Bank , which now has more branches in the United States than in Canada, projected that its annual profit from its U.S. operations could reach $1.6-billion (U.S.) by 2013, up from about $1.3-billion last year.

"Looking further out, we expect the operating environment to be more challenging with sustained low interest rates, regulatory changes and slower economic growth leading to lower margins and slowing loan growth," TD said in its report, also released Thursday. "We intend to manage through this environment by continuing to focus on our core strategy of customer service and convenience, identifying opportunities to invest in and grow businesses, and driving operational efficiencies."

Because these three banks have such a heavy U.S. presence (and in the case of RBC, elsewhere abroad), it's important not to read too much about the health of Canadian borrowers into their main numbers on loan-loss provisions – the amount banks set aside for unpaid loans.

However, for what it's worth, BMO's loan-loss provisions fell $102-million (Canadian) from a year earlier, to $195-million. At RBC, loan-loss provisions were $348-million, $75-million more than last year, in part because of bigger losses on some of RBC's wholesale loans in the Caribbean, but also on some of the bank's Canadian corporate and commercial accounts. TD's provisions for credit losses totalled $388-million in the three-month period, up from $349-million a year earlier. Still, profit was 20 per cent higher.