By Nivedita Balu and Niket Nishant
(Reuters) - Canada's two biggest lenders, Royal Bank of Canada and TD, missed analysts' estimates for quarterly earnings on Thursday as tough economic conditions spurred the banks to make higher provisions for borrowers falling behind on repayments.
TD, which called off its $13.4 billion acquisition of U.S.-based First Horizon this month, said it does not expect to meet its medium-term adjusted earnings growth target range of 7% to 10% due to the failure of the deal.
"We're confident that this was the right decision," TD Chief Financial Officer Kelvin Tran said in an interview.
TD's bid for First Horizon was expected to boost its expansion into the United States, a strategic priority for the Canadian bank as it looks outside of its home market, but the collapse of the deal has left investors wondering where it will find its next avenue for growth.
Tran said the bank, Canada's second-biggest lender, was still focused on its retail network expansion in the U.S. to accelerate organic growth.
TD said on Thursday it would buy back 30 million common shares and would will assess further buybacks by the end of the summer.
"While credit and its own deposit performances were solid, we do not believe that the less than 2% share repurchase plan will generate much valuation support," Barclays analyst John Aiken said.
For RBC, higher-than-forecast expenses were the culprit in the quarter, Aiken said. Most of the big banks noted a rise in expenses related to technology investments and employee-related costs.
"We didn't foresee this environment nine months ago. We didn't see the velocity of deposits moving out of core demand into higher yield at that rate. It started before the U.S. banking crisis," RBC CEO Dave cKay told analysts.
"It accelerated during the crisis. And that caused a real shot to our overall forecast."
McKay said the bank now plans to reduce expenses by managing headcount growth through attrition and slower hiring.
The banks' quarterly results followed those of Bank of Montreal and Bank of Nova Scotia, which missed quarterly earnings estimates on Wednesday due to higher provisions, slower top-line growth and an increase in expenses.
An outlier was CIBC, which topped Bay Street estimates on a per-share basis on the back of higher revenue.
Shares of RBC and TD were trading about 2.2% and 3.5% lower, respectively, in Toronto on Thursday, while those of CIBC rose about 2.2%.
Canadian lenders have largely shielded themselves from the recent banking turmoil in the U.S., but the fallout from three U.S. bank failures has cast a chill over the sector in recent months as some major banks have looked at U.S. expansion for growth.
Inflation, high interest rates and the banking crisis have also prompted lenders to set aside bigger provisions for credit losses to prepare for more borrowers falling behind on their loan repayments.
The surge in the benchmark interest rate has also boosted lenders' net interest income, the difference between what they earn on loans and pay out on deposits.
All the big five Canadian banks set aside more funds for bad loans in the second quarter.
RBC's net income fell 14%. On an adjusted basis, it earned C$2.65 per share, compared with analysts estimates of C$2.79, according to Refinitiv data.
CIBC earned C$1.70 per share, compared with analysts' estimate of C$1.63 per share, according to Refinitiv data.
TD's net income, excluding one-off items, was C$3.75 billion, or C$1.94 per share, also below expectations of C$2.07 per share.
($1 = 1.3372 Canadian dollars)
(Reporting by Nivedita Balu in Toronto and Mehnaz Yasmin, Niket Nishant and Jaiveer Singh Shekhawat in Bengaluru; Editing by Rashmi Aich, Mark Potter, Kirsten Donovan, Nick Zieminski and Paul Simao)