Canadian bank earnings have been strong this year, but the strength has not been reflected in the stock prices — as worries over the country’s housing market and over-indebted consumers linger. Kim Parlee talks with Ben Gossack, Portfolio Manager, TD Asset Management on whether the bearishness may be overdone.
Very good. Thanks for having me back.
It is a pleasure. Let's start with we've got some charts we're going to bring up in terms of just the stock performances on the big five over the last year. And not exactly a banner year.
No. Well, actually, it's been a banner year on a fundamental and operational basis, but not-- there's a big disconnect in what we're seeing in terms of the stock price and the valuation for the bank. So just to give you some perspective, you know, banks this year should deliver earnings growth of about 12%. And in any given year, we expect banks to deliver about 5% to 10% earnings growth. So they're over-delivering this year. And a lot of that is from their bread-and-butter type of activity-- lending, margin expansion, a focus on expenses.
But we've seen the opposite with respect to the performance of their stock. And we're trading at valuation levels that are almost to when oil was back to $26 in 2015 and 2016. So hopefully what we're seeing from this earnings season-- we kicked that off about yesterday-- that we're into an inflection point in terms of the market finally rewarding that performance.
Let's talk a bit about in terms of what you're expecting from the results. And again, we don't have everybody who has reported yet. We've had Scotia and RBC reporting, but I think we've got a chart here we can bring up in terms of your expectations. And again, these-- these look to be pretty good numbers in terms of when you look at percentage year-over-year growth you were just talking about.
Right. So results-- so you're right. We have Scotia and RBC. Results have come in pretty well. Scotia reported earnings growth of about 7%. And we saw about 17% earnings growth coming from Royal Bank this morning. So really good numbers. A bit of noise for each, but underlying that, really good earnings coming out of the Canadian personal and commercial banking. Very solid loan growth to businesses.
We're seeing pretty good results coming out of the US division for Royal Bank. And the outlooks that we've been getting. So one of the nice things about the Q4-- so this is the final fiscal quarter for the banks; they're a little bit early than December-- is that the outlook for 2019 also looks good. I mean, we've been concerned about Canadian housing, a consumer that's over-levered. But we're still getting expectations for sort of mid-single-digit volume growth in mortgages, you know, continued growth in business loans, you know, benefits from the hikes that we've been getting from the Bank of Canada. And that's flowing down into earnings.
What's holding the stocks back then? I mean, is this just the general market malaise that's kind of, I mean, today accepted, obviously? But before that?
So it's something that we're seeing in Canada, we see in the US. And I generally categorize that as fear. We've had sort of a cycle that's extended itself beyond 10 years, and we're getting that 10-year itch that there must be that impending recession around the corner. And then we get trade, and tariff, and all these other concerns.
And then you'd be surprised, but with oil going from $80 down to $50, all of a sudden, people are asking, well, what are the exposures to the energy producers to the banks? And it's still all very good. But typically, when it comes to banks, it's more about the perceived fear than the actual fear. And so that's created the disconnect and the valuation discount. So we're trading at 10 times forward earnings.
Again, this is really low and sort of a trend low for the banks. And so Scotia provided a bit of a miss, but the reaction was muted from the market. But you'd typically see something very negative. And I think we're finally getting to that-- that bottom, that we've priced in all that negativity, but we're not prepared for the upside. And I think that we're almost at that inflection point, where hopefully the market rewards the performance from the banks.
How-- how does this compare to what's happening with the-- the US banks in terms of either what has happened and what you're expecting?
So the big difference with the US banks is they got the benefit of the US tax reform. So their tax rate, you know, went from 35% down to the low 20s. And that went right to their bottom line. We've also seen a favorable swing in reg-- regulations. And that helps them in terms of their capital returns.
One of the concerns that has also faced the US banks is that fear of that impending recession because of our 10-year itch. But we've also seen increased competition for deposits. So the Fed has been hiking since December 2015. And so a lot of that was to the benefit of the banks. But now that's being passed on to the consumer. And so there's a competition for deposits. And that's a headwind to certain banks' earnings.
When you see this chart-- we've got a chart up here taking a look at Canadian banks versus their peers. And what kind of stands out for you in terms of what we've seen?
The biggest takeaway is, you know, we talk about the absolute performance of the Canadian banks being slightly negative this year. But on a relative basis, there's sort of a moral victory here. They've outperformed the broader TSX market. And then they've outperformed the global banks.
So the European banks have been under more pressure. The Australian banks have been under more pressure. And they've been trading in line with the US banks. And it wasn't until recently, when oil went back to $50 and the Canadian dollar weakened, that they started to trail a little bit behind the US banks. So if we just look at Canadian banks, I think they've been holding their weight versus other banks on a global basis.