The U.S. debt ceiling standoff stole most of the headlines the past week. And “this just in” as they say on the nightly news – the Democrats and Republicans have potentially reached a deal. The debt ceiling will be increased and there will be no U.S. default. Phew! Of course most knew how this game of political chicken would end. That said, President Biden and Speaker of the House McCarthy have to convince their parties to endorse the deal. In Canada the big banks reported earnings that disappointed on most counts. Earnings and revenues declined in all banks (except CIBC). The banks have to set aside more loan loss provisions – shoring up for any potential recession. That said, we’re buying the big Canadian banks on the Sunday Reads.
From CNN, here’s some of the details of the debt ceiling agreement.
They will cut $50 billion in spending. It will keep non defense spending relatively flat for two years. The national debt will increase another $4 trillion over the next two years. A recession might make things worse. They will have to reach final agreement and endorsement by June 5th to avoid and government default.
Hopefully, this politcal show is over.
The big Canadian banks
While the big Canadian banks avoided the drama of the regional bank failures in the U.S., they are not immune to stress. CIBC aside, the big banks reported lower earnings and revenues. Though most of ’em came through with some modest dividend increases.
On MoneySense, Kyle Prevost offered a summary of bank earnings while making sense of the markets of the week. Kyle also looked at the debt ceiling.
Canadian bank earnings highlights
Bank of Montreal (BMO/TSX): Earnings per share of $2.93 (versus $3.23 predicted) and revenues of $8.44 billion (versus $8.26 billion predicted).
Bank of Nova Scotia (BNS/TSX): Earnings per share of $1.70 (versus $1.77 predicted), and revenues of $7.93 billion (versus $8.01 billion predicted).
Royal Bank of Canada (RY/TSX): Earnings per share of $2.65 (versus $2.81 predicted), and revenues of $13.52 billion (versus $13.16 billion predicted).
Canadian Imperial Bank of Commerce (CIBC/TSX): Earnings per share of $1.70 (versus $1.63 predicted), and revenues of $5.7 billion (versus $5.69 billion predicted).
Toronto-Dominion Bank (TD/TSX): Earnings per share of $1.94 (versus $2.08 predicted), and revenues of $12.54 billion (versus $12.38 billion predicted).
If we frame the earnings compared to one year ago, Scotiabank earnings were down by 22%, RBC profit fell 14% from a year earlier to $3.6-billion, or $2.58 per share, compared with $4.25-billion, or $2.96 per share, in the same quarter last year, while at TD profits were down by 12%. The banks are putting aside several hundred millions for loan loss provisions. BMO topped the list by moving $1 billion to that emergency fund.
Buying the big Canadian banks
The big banks are in very good value territory, better than historical average. Typically when we buy the banks in this range we are rewarded with very generous returns. In August of 2020 I penned how the Canadian banks were the cheapest they had been in 20 years. From that point, the banks have more than doubled the returns of the TSX. In that 2020 post …
According to Scotia Capital analyst Hugo Ste-Marie the Canadian banks now trade at 10.5 times forward earnings, versus 18.7 times for the broader TSX.
The Canadian market and the banks offer very good value these days.
Dividend Earner offered this recent chart on bank valuations and dividend yield.
On average, we’d have a PE ratio of 10 for the big 5 banks. We can see the value reflected in the generous dividends as well.
Keep in mind that past performance does not guarantee future returns.
Who doesn’t like a sale price?
In my wife’s RRSP accounts, we hold Vanguard’s VDY and iShares XIU. But admittedly she has much more of the financials-heavy VDY. I’ll keep adding. VDY has beat the market by about 1.1% annual from inception.
I like buying stocks and ETFs as they go on sale. I’m buying more Canadian oil and gas stocks as well as they get beat up.
All said, be prepared for more trying times for the big Canadian banks. This stress could last for a few more months or a few more years. We have to be patient and stick to our investment plan. We should remember that over time, buying assets as they go on sale can present incredible opportunity. And we should be buying on a regular schedule, no matter what the investment approach. If you hold an all-in-one asset allocation ETF – just keep buying. It’s that simple.
Buy ETFs for free at Questrade
Same goes if you are with a Canadian Robo Advisor. Add, add, add, repeat.
With respect to the banks, pay attention to any concentration risks – too much in a few stocks or one sector. And, we should always consider any Canadian home bias.
What is the cost of your Canadian home bias?
And for you cash, there’s good news from EQ Bank as more GICs rates have received a boost. I’ve updated the tables.
Make your money work harder at EQ bank.
More Sunday Reads
At My Own Advisor, Mark Seed is staring at debt ceilings and dividends. Mark offers …
We know the answer to the debt-ceiling debate if history is any guide.
Since 1960, Congress has increased the ceiling seventy-eight times, most recently in 2021. Forty-nine of these increases were implemented under Republican presidents, and twenty-nine were under Democratic presidents…just in case you were thinking Republicans this time had a bias 🙂
On Findependence Hub we’re looking at the Canadian Dividend Kings and Aristocrats, by way of Million Dollar Journey. You’ll find some tables for Canadian and U.S. stocks.
Check in with Dividend Hawk for the weekly reads and stock updates. I’m with Hawk on receiving that RBC dividend last week. Included in the mix of posts is an introduction to dividend growth investing, on Simply Safe Dividends.
At Banker on Wheels, it’s the real estate vs stock showdown. Of course, those assets work more than well together. You’ll find a great mix of reads and podcasts on the weekly wrap at BOW.
As part of Jonathan Chevreau’s Retired Money Column for MoneySense – the five factors in choosing that retirement start date.
- Do you have enough money?
- Are you mentally prepared for retirement?
- Have you made a realistic spending estimate?
- Is your portfolio ready for withdrawals?
- What’s your risk tolerance?
Just do it
On stocktrades.ca, Dan shows you how to get moving on creating the stock portfolio in Canada. It’s easy to build a stock portfolio, just as it’s easy to build your own ETF portfolio.
The key is to just do it, as Nike would say. Build your investment knowledge and invest within your comfort level. On that front …
Bob is travelling, so at Tawcan he offers random thoughts from Taiwan and Hong Kong.
Bold economic predictions
John Mauldin is always one of my favourite reads. It’s a SIC mix this week, with some predictions from friends and colleagues.
I think that in the third quarter, we will see that the Fed will give up its QT policy, the quantitative tightening, and if the market declines the way I expect, and it could lead to lower lows, I still have a target that I told my subscribers in late ‘21, about 30% down, which is the low 3,000 in the S&P and maybe 9,000 in the Nasdaq or something like that. That means lower lows below the October lows, sometime in the second half towards later this year.
Lance Roberts at RIA is often described as a bear for putting the risks on the table. But Lance is also on the lookout for an optimistic indicators.
From – Soft recession: is it a possibility? …
However, with that said, some evidence supports the “soft recession” scenario. A recent precedent for such an economic outcome was in 2011.
Perhaps a soft recession would be a best case scenario. No one knows what will happen as Lance points out. All we can do, is be prepared.
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And we’ll see you in the comment section. Are you buying the big Canadian banks? Energy stocks? Do you embrace assets as they go on sale?
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Got enough banks in my non registered account. Owned them for years. In our TFSAs we own GWO which is at the high end of a range bound cycle. Held that one since $37 and now $39+ with a yield of 5.30% or thereabouts. Will sell after the next ex dividend rate next week and buy BNS with a higher yield. BNS has dropped significantly from its high and with the over 6% yield this represents a better deal for us. Our combined income from our TFSAs will be $26,000 which gets reinvested as we don’t need the money … yet.
Another good weekly update, thanks Dale.
I’ve been buying the big banks heavily over these last two weeks. I especially like TD, as with the cancellation of the First Horizon deal it’s sitting on more than $18-billion of excess capital representing 13 per cent of TD’s market capitalization as per a recent article in the Globe. TD announced plans to repurchase 30 million shares and generous dividend increases seem likely.