Quite possibly the most anticipated release of the year here at Stocktrades, we’ll spend this week looking at the Big 6 Bank earnings.
Why? Not only have Canadian banks served as a cornerstone of Canadian investors’ portfolios for many years, but they are also a bellwether of the Canadian economy. Although many of these banks have international exposure, the bulk of their operations will be here in Canada and heavily rely on the Canadian economy.
This email will shape up to be a large one, so let’s dive right into it.
Stay tuned next week as well, however, as we’ll have completed some brand new reports on Bull List additions.
Moves this week
A couple of routine adds for me this week. I added to my Boyd Group Services (TSE:BYD) and Alphabet (GOOG) positions.
I also locked in a stop-loss on my IBIT (Bitcoin) position. The runup in Bitcoin has been spectacular. I figured I would lock in my profits to the point where if it sold off a bit, I would sell and get my position back to my target allocation, around 5%~.
In addition to this, I’m contemplating a bit of a restructuring of my portfolio in regards to Canadian banks after this recent quarter. I’m going to continue to dive into earnings and let members know if I make any moves.
Bank Earnings
Our banking overview will briefly recap each company’s earnings, primarily headline numbers and where the banks have struggled or done well.
Following that, we’ll look at the key performance indicators of the banks as a whole. Make no mistake; these key performance indicators are much more critical data to digest than quarterly results, as they tend to paint a bit of a picture of the bank’s results moving forward, so don’t skip reading them.
Bank of Montreal (TSE:BMO)
The Bank of Montreal didn’t have the best quarter. The company reported earnings of $2.56 per share when $2.95 was expected, and revenue of $7.67B came in $700M below expectations.
The miss on earnings was primarily due to provisions for credit losses, and the miss on revenue was mainly due to weaker insurance revenue and capital markets.
The company reported an 8% decline in revenue, with 2% coming from insurance, 2% from capital markets, and 4% from corporate services. Think of corporate services as business loans, cash management, employer services, etc.
The company witnessed a double-digit drop in earnings per share and a 2.3% decline in return on equity.
After three steady quarters, the company also witnessed its net interest margin, the bread and butter of bank profitability, drop by 17% year over year.
Provisions for credit losses had a significant impact on earnings in the quarter and a considerable surprise relative to expectations. After the earnings recaps, I’ll speak more about this in the PCL section.
On a positive note, the bank reported that its negative amortization situation is improving, going from 22%~ of mortgages in negative amortization to just 15%. This is likely due to variable rate mortgages renewing at either a positive amortization variable rate, or a fixed rate.
Bank of Nova Scotia (TSE:BNS)
The Bank of Nova Scotia posted some strong results, with earnings coming in 5% above expectations and revenue beating estimates by about 3%.
If you had to read the last sentence twice, you’re likely not alone. It has been a long time since Scotia has reported a quarter like this. We’d have to go back to the 4th quarter of 2022 to find the last time the company beat earnings expectations.
Year-over-year revenue is up by 6%, while earnings per share dipped 8% over the same period. Shrinking earnings is not surprising and was largely expected by the market across all banks.
Much like BMO, the company’s return on equity has dipped relative to last year, down 1.5%.
Where it differentiated on the quarter was relative strength in its Canadian Banking segment. Revenue was up 7%, net income was up 1%, and the company realized a 38% increase in net income relative to last quarter, primarily due to reduced provisions for credit losses. Again, we’ll speak on that after these recaps.
Although PCLs in its international segment are trending upwards, so are results. Revenue increased by 9% and net income by 5%. The bank’s international segment has been the main reason for its decade-long struggle. So, the strong quarter is certainly a change of pace.
National Bank (TSE:NA)
National Bank reported a strong quarter. Unlike most other banks, it reported growth across virtually all its segments, resulting in top and bottom line beats on estimates.
Earnings per share of $2.59 topped expectations of $2.34, and total revenue of $2.82B topped estimates for $2.7B.
The company has some of the highest net interest margins of all the major banks. Because their asset mixes vary so much, comparing NIMs on a bank-to-bank basis is challenging but still relevant. On a year-over-year basis, they went up 1 basis point but remain strong at 2.36%.
The company is witnessing strong growth in its Canadian commercial banking segment, and Canadian banking overall. National is more dependent on Canada than any of the other major institutions. So if its Canadian arm is doing well, the bank will do well.
The bank struggled only in the wealth management segment, with flat or low single-digit declining results across the board. However, this isn’t unique to National, as many major institutions report struggles in this area.
Royal Bank (TSE:RY)
It seems to be steady as it goes for Foundational Stock Royal Bank. The company topped headline numbers on both fronts, with earnings per share of $2.85 beating expectations of $2.77, and revenue of $13.48B coming in ahead of expectations for $13.40B.
However, the underlying numbers tell the same story for many of the other institutions, which is that the banks are currently struggling. The company reported a 6% decline in earnings per share on a year-over-year basis and a 2.30% decline in return on equity.
The positive for Royal Bank? It has one of the highest returns on equity of any major Canadian bank, a key factor in the quality of a financial institution.
The company reported a 3% decline in its personal and commercial banking segment, a 27% decline in its wealth management segment, and a 7% decline in its capital markets segment. Some of these losses were offset by the solid quarter from its insurance segment.
The company holds one of the highest CET1 ratios out of the major banks, a key liquidity figure that has been heavily scrutinized over the last few years. We’ll speak on this more in the key performance indicator highlights of the banks after earnings recaps.
Toronto Dominion Bank (TSE:TD)
TD Bank reported a relatively strong quarter when it comes to headline numbers. The company reported adjusted earnings per share of $2 when $1.925 was expected, and revenue of $13.7B topped expectations by $700M~.
Although revenue is up 5% on the year versus 2022, earnings are down 10%. This isn’t all that surprising and has happened to every Big 6 bank outside of National as provisions for credit losses continue to eat away at profits.
Much like the other banks, return on equity witnessed a 200 basis point (2%) dip.
The Canadian banking arm performed well, with net interest margins increasing, revenue up 6%, and net income up 3%. The US arm took a bit of a hit on the quarter, with revenue down 6% and adjusted earnings down 27%.
The company’s CET 1 ratio, of which we’ll talk about more later among all banks, came in at 13.9%. If you remember, TD bailed out on acquiring First Horizon during the regional bank crisis in the United States last year.
As a result, it was flush with cash and artificially increased its CET1. The bank put a lot of this capital towards share buybacks, buying back nearly 21M shares on the quarter.
Canadian Imperial Bank of Commerce (TSE:CM)
CIBC was arguably the most concerning bank out of the Big 6. However, it has strung together a couple of solid quarters, and tensions about this company’s large residential mortgage exposure are starting to ease.
CIBC reported adjusted earnings per share of $1.81, much higher than the $1.66 expected, and revenue of $6.22B came in $440M~ above expectations.
The company reported a 5% increase in revenue over Fiscal 2022 and a 7% decline in adjusted earnings, in line with what most major banks were reporting.
Its Canadian segment continues to do well, posting 10% year-over-year growth in revenue and net income. Its commercial banking and US regional banking segments are mainly what struggled on the quarter.
The bank’s CET1 ratio has improved significantly on a year-over-year basis, bumping up from 11.6% to 13%.
Now lets get into a comparison of the Big 6 on a wide number of key metrics (Make sure you have images enabled)
CET 1 Ratios
The simplest way we can explain the CET1 ratio is that it indicates the ability of the banks to withstand a financial shock. It is a liquidity measurement and gauges a bank’s high-quality capital. The higher the number, the better capitalized the bank.
Regulators require the banks to have a CET 1 ratio of, at minimum, 11.5%. As we can see from the chart above, there really was no bank at risk of not meeting these requirements in the fourth quarter of 2023 except CIBC.
However, the bank raised its CET 1 ratio to 13% this quarter, which should prevent it from having to restructure or issue shares to boost its CET 1 ratio.
Most banks increased their CET 1 ratios outside of TD Bank and Scotiabank. However, there isn’t really anything to worry about here. TD Bank is still reducing this ratio from the fallout of the First Horizon deal and is primarily doing so through share buybacks. Scotia, with a 10 basis point (0.1%) decline, is far from worrisome, as they’re still well above regulatory requirements.
Canada’s banks are some of the best-capitalized banks on the planet. This continues to be true in 2024, despite the rough performance.
Provisions For Credit Losses
To say Provisions for Credit Losses are the most important thing about banks right now would be an understatement. In fact, their earnings reports hinge on them, for the most part.
Provisions for Credit Losses are the money the bank must set aside for loans they expect to go unpaid. These could be loans that have already defaulted (Impaired) and loans that are still being paid but they expect to default (Performing).
Any money they set aside has to come out of the net income of the bank, which impacts its earnings per share.
A Bank’s PCL Ratio is a measure of their PCLs compared to their loans. In the case of the chart above, for every $1 in loans Scotiabank has, 5 cents, or 0.5% of them, are set aside as PCLs.
For the most part, the banks reported increasing PCLs. This is not that surprising, as the economic situation in Canada is far from promising.
The biggest surprise for us, at least, was the fact that BMO had by far the worst quarter out of the banks when it comes to provisions. The bank’s PCLs increased by nearly 50% on a quarter-over-quarter basis, and its PCL ratio increased by 40%.
The increase itself wasn’t the most surprising thing. It was the fact that the Canadian housing market has often been labelled as the biggest drag among these Canadian banks, and BMO has the lowest exposure out of all major banks to Canadian housing at 23%. Compare this to a bank like CIBC, which sits at 51%, and you can see how much lower it is.
Scotiabank not only reduced its PCLs on the quarter relative to last but also reduced its PCL ratio. However, this was largely the result of PCLs coming in much higher than expected in Q4 of 2023. Although it’s a good sign it didn’t report yet another quarter of sky-high PCLs, this is more of a normalization than a reduction.
If this chart can tell us anything, it’s that there are business-wide struggles among the banks, and it’s not just the real estate market that is dragging them down.
Payout Ratios
The payout ratios of the major banks can tell you a lot of what to expect in the future, primarily concerning dividend growth.
Why? Most of these banks stick to hard and fast rules regarding how much of their earnings they’d like to pay out as a dividend. Mostly, they will be in the 40-45% range.
However, a couple of the struggling banks over the last while, mainly CIBC and Scotia, have higher historical dividend payout ratios because of slower earnings growth, along with continued growth and maintenance of the dividend.
Currently, three of the six banks are hovering above their historical payout ratio. TD, BMO, and Scotia. TD Bank and BMO are still well within the comfort range, so we have little worries there.
Scotiabank, on the other hand, is approaching a 70% payout ratio. There have been two instances in the past 20 years where the bank’s payout ratio has approached 70%, one being the COVID-19 pandemic and the other being the Financial Crisis of 2008. In both instances, dividend growth was halted.
One could argue that the only reason Scotiabank stopped dividend growth in 2020/2021 was because of regulators. However, it did come out with some of the weakest dividend growth out of all the major banks once regulators eased restrictions.
This chart tells us that Scotia had a relatively solid quarter, but it’s far from out of the woods yet.
At 70% of earnings, we certainly don’t believe there is any risk of a cut to the dividend for Scotia if it can maintain this ratio. However, if its payout ratio stays this elevated, we wouldn’t expect any meaningful growth to the dividend or, quite easily, no growth at all.
Projections for 2024
The chart above shows that 2024 is expected to be a relatively weak year for Canadian Banks.
Aside from National Bank, every institution is expected to post flat or declining earnings relative to last year.
Provisions For Credit Losses, lower consumer spending and borrowing, and possibly falling policy rates are all headwinds that could hit the banks in 2024.
National Bank, on the other hand, is expected to put up strong single-digit earnings growth in 2024. There is no doubt the smallest of the Big 6 Banks is driving the strongest results right now.
These are, of course, projections. Analysts are known to be wrong frequently, but there is no doubt that National is looking stronger than ever at this point in time.
Overall, it was a relatively soft quarter for Canadian banks
The Canadian economy is set to struggle over the short to mid-term, and as a result most analysts and investors are bearish on Canadian banks. In addition to this, actual earnings declines are causing depressed valuations and as a result banks haven’t done much in terms of appreciation and may not do much in 2024 either.
