It’s been a mixed bag for Canadian bank earnings this quarter as the banks operate against a challenging market backdrop. What’s the outlook for bank stocks going forward? Kim Parlee talks to Ben Gossack, Portfolio Manager, TD Asset Management.
Hello, and welcome to the show. It's bank earnings reporting week. And so far, the Canadian big banks haven't exactly been singing from the same song sheet.
Here to bring down the performance and the outlook for the financial sector is Ben Gossack. He's portfolio manager at TD Asset Management, frequent guest. It is great to see you here.
Great. Thanks for having me back.
Let's talk a bit about the banks. Not all the banks have reported. It's been basically everybody, but I think TD and CIBC are coming out later this week. How are they looking so far?
Yeah, so we're through four banks. CIBC, TD tomorrow. I'd say, at a high level, earnings have grown about 3% this year. Putting that in context, we expect banks to grow earnings 5% to 10%. So you think for the next three quarters, there's a lot more work for them to do.
But as we were saying, they're not singing from the same song sheet. So we've had one bank beat. We've had one bank in line with expectations. And we've had two banks miss.
Let's bring up the scorecard, as you like to bring up, and dig in a little deeper. Because, I mean, every bank-- and you have talked about this, we were talking before the show started-- they have their own song, in terms of what's going well for them and what's not. So let's just go through RBC, which was in line.
Yeah. So RBC had an in line quarter. It was actually a pretty good performance for them. I think what surprised the market was on the credit side. They were exposed to one credit issue from a California utility that was impacted by the wildfires.
I think they also took the opportunity to build up some reserves, to be a little bit more conservative. But in line, when we look at the Canadian banking performance, when we look at their wealth, when we look at their US bank, City National, I mean, the bread and butter stuff that they're doing has actually been quite good. It's just when banks build up provisions, then people start to ask questions. And given this late in the cycle, people start getting worried that there's something systemic. But so far, the issues that we saw with Royal were pretty transitory.
Scotia? Oh, sorry.
It'd be the same thing for every other bank, too, just a different issue. So if credit was a negative surprise for Royal Bank, it was a very positive surprise for BMO. They actually saw some relief in one of the provisions that they had built up in the US. And so that's what drove the beat for BMO.
Taking that back, they still had really good earnings. It was really nothing to scratch at. When you think about BMO, you care about their US operations.
But they grew loans very well. They saw a big expansion in their margins. So all in all, it was actually a pretty good quarter for BMO, aside from the fact that they got a lot of help from credit.
Let me ask you. Sorry. I was jumping in on you with Scotia. Because Scotia, of course, had a miss. And this wasn't the first quarter they had a miss.
They've had some mixed quarters. And we've been looking through every quarter for, let's say, the last four quarters. They did about $7 billion in acquisitions last year. In Canada, you think of MD Financial, Jarislowsky Fraser. But they also did a lot of consolidation in their Latin American markets, Chile, Peru.
This was going to be the easier quarter. But what surprised everyone was a big increase in expenses. So expenses for the bank grew about 19%. 2/3 of that are related to the integration efforts. Again, it would be transitory. But it does make up-- it means they have a lot of work to do now for the next three quarters to get back on track.
Let me ask you. Those are some of the big names. When you take a look, though, at how banks have been performing for investors over the past while, I mean, how do you view performance and how do you view valuation right now?
Well, we thought they put up great operating performance last year. It just wasn't rewarded by shareholders, or by the market. So banks were down about 8% last year. We've seen a nice spring back this year. So banks, on average, are about up 12% year-to-date.
Yeah. Off of a very bad December.
Off of a very low December. But what's really supportive is just the valuations. If you think about bank earnings, they tend to trade in a valuation range of 10 to 12 times. Going into December, it was getting almost dire, to the point that it was 8 times forward earnings.
And we talked about this. We're talking about valuation levels back when we were worried that oil went from $100 to $26, and we would have credit issues in Alberta. None of this has prevailed.
You can see that we've sprung back to about 10 times forward earnings. But again, we're still trading at the very low end of the historical range. So from a valuation perspective, the banks still look pretty attractive.