Canada's big banks earn $35B in profits for 2015

This was supposed to be the year that the bottom line of Canada's big banks would feel the pain of a weak economy,the slumping oilpatch, cautious consumers and low interest rates.

It didn't quite work out that way.

Fast forward to this week and the big six reported fourth-quarter earnings that in most cases topped last year's. Three banks even managed to boost their stock dividends.

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• Royal Bank has record annual profit of $10B

• TD, CIBC report solid Q4 profits amid restructuring efforts

For the fiscal year as a whole, the six banks reported total earnings of almost $35 billion,with Royal Bank's record $10-billion profit leading avery healthypack.

That eye-popping totalrepresentsa jump of almost five per cent from last year.

Controlling costs

How did the banksmanage that?

Expense managementis the current mantra amongbank executives these days. Staff numbers are being trimmed as the banks move to restructure their operations tomake them more efficient.

At TD, for instance, the bank cut 1,594 jobs in the past year, while Scotiabankhas dropped 1,140 staff since the end of July.Royal Bank reduced its full-time ranks by 528, mostly by not replacing workers who left.

But the black ink isn't simply due to cost controls.Banks with large U.S. banking operationshavebenefited, as Canada's lower dollar meant theirU.S. earnings were worth even more. TD, for example, now has more branches in the U.S. than in Canada.

And most banks reported that their retail and business banking arms performed well as loan volumes rose and deposits grew. Wealth management and capital markets operations flourished, in mostcases.

Banks also saved some money when they decided not to pass along all of the half-percentage-point cut the Bank of Canada made earlier this year in its key lending rate. Banks dropped their prime lending rates by a total of just 0.30 per cent.

And then there's everyone's favourite banking complaint servicefees. Mostbanksincreased fees this year. The exact effectof those increases on profits, however, isn't clear.

Bumpy road ahead?

All of this is not to suggest that the banks facenothing but rosy profit pictures in the future.

In the West,commercial loans to oil and gas companies in Alberta will bewatched closely in the wake of near record low oil prices and tens of thousands of layoffs in the industry.

At the RoyalBank, eight new companies in the energy sector have been added to its watchlist. Chief risk officer Mark Hughes also says he's noticed a "slight upward trend" in delinquencies in auto loans and credit card accounts.

A report this week from the credit monitoring agency EquifaxCanada found consumer loan delinquencieswere rising in every province that has a large energy industry.

• Canadians in oil-producing provinces having more trouble paying debts

Questions abound about whether changes are coming to the mortgage world.There have been suggestionsthat Canada should consider requiring that bankscovera portion of the losses on insured mortgages (needed whenhomebuyershave less than 20 per cent down).Currently, the Canada Mortgage and Housing Corporationand a few private insurers cover those claims, with Ottawa ultimately backing all mortgage default insurance.

Forecasts downgraded

The banks are facing other potential bumps in the earnings road. Canada'seconomic outlook for 2016 is hardly robust and growth forecasts have been ratcheted down.

John Aiken, a bank analyst at Barclays Capital, sayshe expects theweak outlook will translate into pressure next year onRoyal Bank'sdomestic operations.

"When we look into 2016, it doesn't dissuade our thesis that there will be ongoing challenges," he said.

Facing these challenges, the banks are makinghefty investments in technology to power their efficiency drives and protect their market share from new financial technology competitors, like Apple and Google.

"We're continuing to invest in our digital channels and also to invest in automating and simplifying our processes," RBC chief financial officerJaniceFukakusatold analysts during the bank's conference call on Wednesday.

DavidBeattie, a senior bank analystat Moody's Investor Services, noted lastmonththatdigitization, while costly upfront,willproducepayoffs for the banks down the road.

"They're getting to the point where they're really doing some substantive changes to the way they run their businesses," he said in aCanadian Press interview.

"Digitization is doing that anyway, but the pressure of low interest rates and spread compression and low revenue growth is just making it all that more critical."

Big banks' big profits ($B)

Fiscal 2015 Fiscal 2014

Royal Bank $10.03 $9.00

TD Bank $8.02 $7.88

Scotiabank $7.21 $7.30

BMO $4.41 $4.33

CIBC $3.59 $3.22

National Bank $1.62 $1.54

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Total: $34.88B $33.27B