Canadian banks have reported quarterly earnings and their performance has been mixed. Monica Yeung, Global Financials Analyst, TD Asset Management, talks about earnings results and why bank shares haven’t performed better.
- So most of the major banks have reported. Monica, what stood out for you?
- Q2 has actually been a bit of a mixed quarter for the Canadian banks. Most of the banks have reported so far. We've had two beat on earnings expectations and two miss on expectations. On average, we've seen earnings per share growth this quarter of about 4% compared to last year.
Now, to put that into a broader context, Canadian banks have posted double-digit earnings growth for the last couple of years. So Q2 does seem like a notable deceleration in earnings growth. And I think it's a proof point in terms of what kind of trend we can expect going forward.
- You mentioned trends. What are some of the trends that you're seeing?
- So in terms of a tailwind to earnings, one of the big drivers of earnings growth was actually capital markets. So this would be your trading, your investment banking type revenue. It was up actually 30% compared to last quarter. We saw a very good improvement in client activity. There was very good underwriting and advisory revenue and also good fixed income trading as well. So that was a nice tailwind to earnings, and pretty much all of the banks beat on this segment.
- Now, banks have underperformed the broader market throughout the year. Where do you see valuations going?
- So on average, banks tend to trade within a range of about 10 times to 12 times forward price to earnings. Since the start of the year, they've reverted to a level towards the lower end of that range. But we still think that there's good value at these levels, especially if banks can continue to deliver mid to high single-digit earnings growth. That is still perhaps a deceleration from what we've seen in the past. But if you combine that with a 4% to 5% dividend, that presents pretty good value for investors.
- So Monica, you mentioned some of the tailwinds. What are some of the headwinds going forward for the banks?
- So I think one of the things that really stood out this quarter was a slowdown in Canadian personal and commercial segment. On average, we saw this segment grow at only 1% this year compared to last year, which is much slower than what we would normally see or what we're used to seeing in the past. And I point to, in particular, real estate secured lending growth. So this would be your bread and butter mortgages, your HELOCs. We actually saw this grow in the 2% to 3% range. CIBC was a standout or an outlier in particular. They actually saw this book of business decelerate or decline compared to last year.
The other thing that I would say as a headwind to earnings is provision for loan losses. So Canadian banks have benefited from historically low loan losses on their portfolios for the last couple of years. And as we get later in the economic cycle, I think the expectation is for that to normalize to a higher level, more in line with what we've seen in the past. And that's certainly something we saw this quarter, certainly nothing that would indicate any systemic stress in the system or a turn in credit, but enough to be a meaningful headwind to earnings growth going forward.
- Monica, thank you very much for your time.
- Great. Thanks for having me.