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The US's hot economy increases TD and CIBC's profits, but competition is rising

Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce can thank for the hot American economy for higher profits. However, it is expected that significant US bank operations will not grow to 2019 due to growing competition.

TD and CIBC, which released revenue from the end of the year on Thursday, have a large exposure to large-scale acquisitions in the United States. Recently, the growth of profits from these divisions is encouraging – especially for TD. The bank, which has passed years of anemic earnings in a US and commercial bank in the US after the global financial crisis, recorded a year-on-year profit from retail banking in the US 26 percent to $ 4.2 billion.

It seems that the economic situation in the US is too good. Renewal is almost ten years and inflation and wages are still quiet, prompting the Federal Reserve to raise interest rates eight times over the past two years.

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As the business flourishes, the US banking market has been extremely competitive. "Competition has risen," said analyst DBRS Ltd. Robert Colangelo. "Although the US is a very large market, it is limited how large the market share of the bank can have – especially on the commercial side."

Managers of both banks repeated this day in conference calls on Thursday. "He was definitely competitive" in attracting commercial deposits, said Greg Braca, head of the American banking group at TD.

"We have reached the threshold," said Larry Richman, head of the American CIBC region. "As rates rise, clients who have excessive cash want to get paid for it."

Small and commercial banks make money by attracting cheap deposits and borrowing this money at higher rates. Recently, US banks could charge more on credit because interest rates are rising.

However, the deposit-taking market is becoming more aggressive, causing banks to repay deposits and slow down credit growth.

Several clouds are also created above the US economy. In a report released on Thursday, Standard & Poor's rating agency noted that "the US recession risk has risen and growth is likely to slow even if the US-China tariff strike does not rise into a trade war."

S & P said the probability of a decline over the next 12 months is 15 to 20 percent, compared with 10 percent to 15 percent in its previous forecast.

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Despite the shifts in the United States, the overall profit of both banks is expected to be higher in the next year. TD is particularly optimistic when CEO Bharat Masrani predicts a 7 to 10 percent increase in earnings in the fiscal year 2019.

The CIBC is slightly less upward and expects an expansion of 5% to 10%. However, the bank remains optimistic about the quality of its credit book. "While potential gains remain, as we appear to be entering the later part of the business cycle, we remain confident that we are in our strong insurance practices and the quality of our credit portfolios," said Chief Risk Officer Laura Dottori-Attanasio, a conference call.

Investors had differences in response to earnings that were announced on Thursday. TD shares were fairly flat by the end of the trading day and closed at 73.48 USD, while CIBC shares fell 3% to 112.46 USD.

For the fiscal year ending on October 31, TD posted a net profit of $ 11.3 billion, up nearly 8 percent over the fiscal year 2017, while CIBC's annual turnover rose to $ 5.2 billion, which is 12 percent more than in the previous year.

Earlier this week, TD and CIBC announced details of their participation in the acquisition of the Air Canada Loyalty Program. TD strongly relies on Aeroplan and pledges to advance payments of $ 1 billion and future spending as its major financial partner. The agreement with Air Canada will start in 2020 and will last until 2030.

The CIBC will be a secondary partner in a new arrangement and agrees to pay a total of $ 292 million.

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