It’s what most Canadian investors were waiting for – Canadian banks earnings reports. The two biggest banks, RBC and TD were first out of the gate. The general consensus among bank analysts was that the banks would show softening earnings. While TD stuck to the script, RBC (once again) had other plans. RBC is not going to lose its ‘Beast’ nickname anytime soon. The earnings reports show how resilient are the Canadian banks. That’s not to suggest that there are not considerable risks (there are), but for now it appears that the Canadian bank oligopoly is stickhandling through any economic tremors. RBC shows the way on the Sunday Reads.
While we often mention how superior the U.S. economy and U.S. stock market is compared to Canada and the TSX, consider that the Canadian banks doubled the returns of the S&P 500 from 2000. And the beat goes waaaaaaay back pre 2000. It is arguably the best performing large cap sub sector in North American stock market history. Of course, past performance does not guarantee future returns.
General weakness in Canadian bank earnings was the consensus analysts’ call …
Increasing revenues at TD and RBC
Revenue at TD Bank increased by 12% year over year. At RBC, revenue increased 20%, but adjusted for special one-time events the revenue increase is reported as 16%. Not troubling times at all when we consider revenue growth.
During times when interest rates are rising, banks and other lenders oftentimes hike the rates they demand quicker compared to the rates they offer to depositors. That spread results in rising net interest margins. They call this net interest income. That event has helped during the past quarter and during this rate hike cycle.
Profits are another story
Toronto Dominion Bank saw its earnings per share decline by 3% year over year, while Royal Bank of Canada actually managed to grow its earnings per share.
TD has set aside more funds for bad loans – provisions for credit losses.
Funds that are on hold for risk management can’t be categorized as profits, and they can’t be used to pay dividends or buy back shares, or pay down debt. That said, TD did a massive buyback of 90 million shares. That’s 5% of shares outstanding according to Seeking Alpha. That buyback just increased your ownership of the company.
The total for loan loss provisions for the Big Six banks rose to $3.5-billion during the quarter, up 130% from the same period last year.
Since 2000, the average PCL ratio – which essentially compares the value of troubled loans to the total value of all bank loans – is 0.41%, according to RBC Dominion Securities.
The ratio soared to a high of 0.82% during the financial crisis in 2009; it fell to a low of just 0.03% in 2021, after low interest rates and government financial assistance during the COVID-19 pandemic reduced credit risk and the banks reversed previous provisions.
Now, PCL ratios are rising again – to 0.13% in 2022 and 0.28% in the banks’ fiscal second quarter. In the most recent quarter, the ratio climbed to 0.35%.
And here’s a chart that breaks down TD net income by category.
We see that softening, but no major stress. TD is a very profitable operation.
RBC rings up greater profits
RBC saw income increase by 8% year over year, and 10% on an adjusted basis. As I often write, RBC is a beast. It simply has so many ways to make money. Canada’s largest bank is very well managed to say the least.
RBC made money across the board, with increases everywhere except for wealth management. That’s actually good news as investors seek out lower fee investment products such as building an ETF portfolio, or creating a portfolio of individual stocks.
Of course, while I hold RBC it is the goal of this blog to crush high-fee mutual funds, including the RBC Select Mutual Funds. The flagship funds have fallen on hard times. If you want some help in leaving your mutual funds behind, please send me a message. I am happy to help. There is a much better way to build wealth.
And I promise you, it will be life changing.
The forward PE ratios are very attractive
The big banks still make a lot of money.
It’s possible that dividend growth will stall as the banks measure the risk of a recession, as earnings mostly decline or soften. More on valuation …
Canadian bank earnings continue to roll in
Here’s a brief recap on the bank earnings for the week ending September 1. Thanks to the Globe & Mail for some tidy posts on the matter.
BMO earned $1.45-billion, or $1.97 per share, compared with $1.37-billion, or $1.95 per share, in the same quarter last year. It was a very solid report.
- Earnings Q3 2023: $1.45-billion ($1.97 per share)
- Earnings Q3 2022: $1.37-billion ($1.95 per share)
- Adjusted EPS: $2.78 per share
- Analysts’ expectations: $3.09 per share (adjusted)
Total revenue rose from the same quarter a year earlier to $7.9-billion. But expenses increased 46 per cent to $5.64-billion as the bank integrates its takeover of California-based Bank of the West.
Scotiabank reported lower profits than met earnings estimates. Much larger loan loss provisions impacted profits. The bank is seeing some nice returns from international operations.
- Earnings Q3 2023: $2.21-billion ($1.72 per share)
- Earnings Q3 2022: $2.61-billion ($2.10 per share)
- Adjusted EPS: $1.73 per share
- Analysts’ expectations: $1.73 per share (adjusted)
National Bank saw an increase in profits year-over-year. That was impacted by increasing costs (up 9%) and larger loan loss provisions.
National Bank earned $839-million, or $2.36 per share, in the three months that ended July 31, compared with $826-million, or $2.35 per share, in the same quarter last year.
Many that I follow would suggest that National joins RBC and TD as the highest-quality and best-managed banks.
CIBC reported on August 31.
The perennial runt of the litter was also able to increase revenues year-over-year. Revenue of $5.85 billion was up 5.0%. Provisions for credit losses was C$736 million, up C$493 million from the same quarter last year.
Given that (and increased costs) earnings took a 18% hit.
Adjusted earnings per share were $1.52 compared to $1.85 in the same quarter in 2022.
Early in the loan loss provision cycle
Here’s a good Canadian bank earnings wrap, thanks to Scott Barlow at the Globe & Mail …
Keep on keepin’ on
We should never waiver from our investment plan. Accumulators should add money on a regular schedule.
Canadian stocks are dirt cheap.
If you’ve been sitting on cash, consider dollar cost averaging into equities or your balanced portfolio. There are great targets in the Canadian market, including the banks. Those who are more active in their investment approach might strategically move funds to the beat up sectors. Of course, we should always keep portfolio diversifcation (sector and geography) in mind. Be careful with drastic overweight positions to any sector or stock.
In my wife’s accounts I am more than happy to keep adding to the financials-heavy Vanguard VDY.
In price terms, the Canadian High Dividend ETF is languising. That has been a wonderful accumulation opportunity. Investors have to buy into stress. When we’re buying into stress into a group of very good and very profitable companies, that usually leads to very robust total returns over time. Of course the same could be said for buying the Canadian market such as the XIU or XIC ETFs. We also hold XIU in my wife’s accounts.
While total returns will be the most important measure in the end, investors certainly take comfort in the dividend haul. We’re being treated to another generous dividend bump in 2023.
The current yield for VDY is now near 5%. It’s even greater in iShares XEI.
You can buy ETFs for free at Questrade.
Retirees might benefit from those generous yields. And they can supplement that growing yield with the generous GIC rates of the day. It seems that every week I update the post to reflect the increasing GICs rates at EQ Bank.
Here’s why retirees hold bonds, cash and GICs.
IMHO, these are good times for retirees and accumulators. We can buy wonderful fixed income yields and very attractive earnings yields.
What’s not to like?
I am also happy to keep adding to Canadian oil and gas stocks. The most profitable sector with the greatest dividend growth (reflecting the underlying free cash flow trends). That sector might continue to provide cover for weakness in financials, telcos and pipelines.
More Sunday Reads
For MoneySense Jonathan Chevreau looks at ETFs for retirees. We can certainly go beyond the core ETFs and the traditional balanced portfolio. You will find some of my commentary in that post. Thanks Jon.
At My Own Advisor Mark Seed offers why investing is different. That’s a good read bouncing off a post on investment basics from Steadyhand.
At Passive Canadian Income Rob gives us his July portfolio report. Rob has been tracking his monthly dividends from 2016 …
You’ll also see some of Rob’s recent moves – trimming Black & Decker and Microsoft, while adding to Telus. Personally, I like the idea of being competely passive. Buy good companies (or the market) and stick to the script. If one is worried about valuation, perhaps avoid that stock and move money to where you see greater value.
It’s different in retirement. We have not sold out of any stocks, but given the valuation levels I was trimming some Microsoft. Essentally, that is just basic rebalancing. Generous stock gains moved to generous fixed income.
Dividend Hawk’s weekly post shows that he was sharing in the RBC dividend this past week. You’ll also find Hawk’s favourite blog posts of the week.
At Banker on Wheels, fear and greed and searching for safe havens.
There is sooooooo much in every weekly BOW post.
And on the topic of risk in Canada, Martin Pelletier shared …
Here’s an update on sector and style performance for the U.S. market. Growth is still in, value and defense not so much.
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Great summary Dale, thanks.
TD at a 4.7% yield and RY at 4.45% yield sure look tempting. But being under all KMAs, sitting on support and with so much uncertainty going forward gives me pause. Dollar cost averaging as you advise seems a good strategy for a long term hold.
Ya, we don’t need to guess. We can always buy them, but the banks are not certainly ‘cheap’ at the moment due to pessimism.
We stay within our allocation level comfort zone, that is all.
I keep buying more BNS and it’s now my largest holding. In 35 years the average return on the DOW was 6.5% according to a chart I have pinned to the wall. This more or less resonates with average returns over the past 100 years re. the TSX. I’m getting 6.5% and the Fed/Provincial dividend tax credit – it will keep going up albeit not so much this year. The last time Scotia cut was in 1942 and looking at the numbers that is not on the table. Talk to me in 10 years.