The Canadian banks reported quarterly earnings this week, and as the Go-Go’s sang “we got the beat”. The banks were beating on earnings and revenues in every which way. A beat means that they surpassed the expectations of the earnings analysts who price the stocks. So perhaps it is not that the banks beat, but that the analysts got it terribly wrong. And they were wrong to a very large degree. The Canadian banks got the beat on Weekend Reads.
And good luck to the Go-Go’s who were nominated to enter the Rock & Roll Hall of Fame. But should they really get in The Hall before The Guess Who? I’d guess not. That’s what you get for penning the sarcastic “American Woman”.
But let’s turn back to those Canadian banks, and let’s have a look at the beat.
The Canadian bank beat.
The first two banks to report were Scotiabank and BMO.
- Bank of Nova Scotia: Q1 Non-GAAP EPS of C$1.88 beats by C$0.32; GAAP EPS of C$1.86 beats by C$0.30.
- Revenue of C$8.07B (-0.9% Y/Y) beats by C$490M.
- The provision for credit losses was C$764 million, compared to C$1,131 million, a decrease of C$367 million or 32%.
- Bank of Montreal: FQ1 Non-GAAP EPS of C$3.06 beats by C$0.91; GAAP EPS of C$3.03 beats by C$0.94.
- Revenue of C$6.37B (+5.6% Y/Y) beats by C$410M.
Those are significant beats. And certainly BMO set the bar very high. To put this all in perspective, the quarter in question here is the period of October to end of December, for 2019 compared to 2020. 2019 was pre-pandemic. BMO increased revenues year over year. Meaning they had greater sales during a pandemic compared to ‘non pandemic’.
That theme was advanced by the rest of the Canadian banks that reported throughout the week. As many will say the Canadian banks have a lot of oars in the water. They have many ways to make money.
Capital markets and wealth management were two of the main drivers of business success. The investment markets have been doing well, and individual investors are active. The banks take their cut.
Sidebar, it was nice to be the ‘Tweet of the day’ for Scott Barlow in the Globe and Mail.
More bank beat recap.
And speaking of the Globe and Mail, thanks so much to James Bradshaw, the banking reporter for the Globe, for this post. There is a paywall, but I will give you the important bank bits.
James begins with …
Profits at the Big Six banks totalled $13.9-billion in the three months ending Jan. 31, rising above prepandemic levels. Massive government stimulus programs, roaring financial markets and clients leaning on banks to help them through the crisis have created an unusually opportune climate for banking, in spite of the damage the novel coronavirus has done to the global economy and public health.
On Thursday, CIBC and TD wrapped up the fiscal first-quarter earnings season with results that far surpassed analysts’ estimates with profits increased 13 per cent and 10 per cent respectively. It’s not just revenue beats, it’s the all-important profit beats that added an important note.
On the favourable business environment.
Canada’s banks do everything from everyday banking to wealth management to sophisticated transactions for large corporations. That is by design: When one division struggles, another often picks up the slack. For instance, low interest rates have narrowed profit margins from loans. But corporate clients have taken advantage of low borrowing costs to raise funds or do deals, generating fees for investment bankers.
Another bank with an impressive beat was National Bank of Canada. This is a longtime favourite of Mike at Dividend Stocks Rock. It is his favourite bank, and he has long been pounding that drum. Yes Mike you have been right. 🙂 This is the strongest bank with respect to total returns over the last five, ten years and more.
- National Bank of Canada: Q4 Non-GAAP EPS of C$1.69 beats by C$0.19; GAAP EPS of C$1.36 misses by C$0.11.
- Revenue of C$2B (+4.2% Y/Y) beats by C$30M.
If you were going to pick a few banks to buy I believe Mike would suggest the hat trick of National, RBC and TD.
Good news for Canadian investors.
The financials can drive our stock indices. And as we know many Canadian investors love to hold the individual bank stocks. While there are always considerable risks, the banks are in a good spot say many analysts.
Banks can do well in a rising rate environment and when we see the increase in spread between shorter term rate and longer term rates.
This week, the bond markets went crazy as I reported on MoneySense. We’ll be keeping an eye on that story and development.
What about the dividends?
And while dividend increases are on hold at the command of regulators, I suggested in this MoneySense post that there may be special dividends for Canadian banks and insurance companies in 2021. It’s a possibility. If not this year, eventually those loan loss provisions that were set aside will eventually find their way to our pockets by way of regular dividends or by way of share buybacks. And that’s assuming all goes well enough on their loan books.
I’m happy to hold a 25% portfolio weighting in Scotiabank, RBC and TD. My wife has less exposure, and that comes by way of Vanguard’s Canadian high dividend – VDY. We might continue to see the big dividends fight their way back in 2021, against cap weighted stock indices.
Here’s Vanguard VDY vs iShares XIC (cap weighted market).
The dividend funds have underperformed, here’s the Canadian Dividend ETFs in 2020.
And on a final note, you might have a read of my post for Million Dollar Journey, investing in Canadian bank stocks.
The Weekend Reads.
From Fritz at Retirement Manifesto, and on-theme here is investment options to protect against inflation. That’s a very solid post.
On the economic front another masterpiece from John Mauldin with the great jobs reset.
The Federal Reserve is primarily focused on unemployment and not inflation, according to numerous officials and Jerome Powell. They are willing to let the economy “run hot.” That means tolerating higher inflation for some period while they try to reach what they consider “full employment.”
However, as is so often the case in government, the left hand is not working with the right hand. The bond market has not been happy the past few weeks.
A must watch video on what is going on with the bond markets and the authorities.
Flipping back to the investment front, Savvy New Canadians looks at the Moka (formerly Mylo) app, for automated saving and investing.
Here’s the ultimate RRSP guide on Family Money Saver.
On Findependence Hub, Ian Duncan MacDonald offers the ideal stock.
Another stellar effort in The Sunday Newsletter from the Sunday Investor. You’ll find some yield-focused ETF portfolio ideas in this week’s post.
GenYMoney is teaching money to preschoolers.
Mike The Dividend Guy goes all ones and zeros with a look at the tech sector.
From Alexandra Macqueen (on MoneySense) what should a senior do with a $70,000 windfall.
And I was very pleased to be mentioned in The Ultimate Canadian Student’s Guide to Personal Finance in 2021. Thanks to Jeff, this will be an interesting blog and personal journey to follow. Jeff will be off to Harvard this Fall.
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