30 August 2018

TD Bank Q3 2018 Earnings

The Globe and Mail, James Bradshaw, 30 August 2018

At TD, earnings from Canadian retail banking rose 7 per cent in the third quarter, to $1.85-billion. But profit from its extensive U.S. footprint rose 27 per cent, to $1.14-billion.

Toronto-Dominion Bank reported a 12-per-cent bump in third-quarter profit to cap off another smooth earnings season for Canada’s big banks, as higher international profits and wider lending margins more than offset any drag from a slower mortgage market.

With interest rates rising and low unemployment across North America, Canadian lenders made gains. Domestic profits rose by a respectable 5 per cent to 8 per cent at most banks, while international operations – mostly in the United States and Latin America – produced outsized returns, helping total earnings outpace expectations.

At TD, earnings from Canadian retail banking rose 7 per cent in the third quarter, to $1.85-billion. But profit from its extensive U.S. footprint rose 27 per cent, to $1.14-billion, helped in part by U.S. tax cuts, which provided a $61-million lift to earnings.

Longstanding concerns about hot-and-cold Canadian housing markets, trade upheavals and high consumer debt persist, but none of those risks appear to have held banks back in any meaningful way. Five of the country’s Big Six banks surpassed expectations for earnings per share in the third quarter, with only Bank of Nova Scotia falling short by one cent as it works to close and digest six deals worth $7-billion announced within a nine-month span. Total profits for the country’s six biggest banks reached more than $11.6-billion in the three months that ended July 31.

For some time, bank executives have acknowledged that after a decade of economic expansion, the current business cycle may be entering its later stages, but the banks’ recent results show no signs that a downturn is imminent.

Expected loan losses inched higher at some Canadian banks in the third quarter, including Royal Bank of Canada, which earmarked an extra $90-million to cover potential losses on loans that are currently performing, to meet new accounting standards. TD set aside a total of $561-million to cover loans that may go sour, up 11 per cent from unusually low levels a year ago. Yet, credit remained healthy across the sector in the third quarter, even as a steady drum beat of rate hikes by the Bank of Canada threatens to add to the burden on debt-laden consumers.

“Credit is a really strong part of the story here. The theme with Canadian banks is that credit is ultimately going to be a headwind, but we don't see any signs of that yet,” said Jim Shanahan, an analyst at Edward Jones & Co.

As expected, the Canadian mortgage market has cooled as a series of measures by governments and regulators tighten the conditions to qualify for home loans. That has eaten into the rate of growth in banks’ mortgage portfolios: CIBC increased residential mortgage balances by only 3 per cent, year over year, and Bank of Montreal lagged the group with 1-per-cent mortgage growth. But as customers begin to adjust to the new measures, declining growth in borrowing shows signs of levelling off, and banks have compensated by taking on more commercial loans and by controlling costs.

“In Canada, over the last year and a half, we’ve seen much better economic growth than was anticipated,” said Riaz Ahmed, TD’s chief financial officer, in an interview. “We’re also seeing consumer resilience, and interest rates are rising steadily but slowly, which gives everybody time to adapt.”

Several bank executives also expressed renewed optimism about trade this week as a revamped North American free-trade agreement looks to be within reach, after a year of strained negotiations. Should Canada reach a new deal with the United States and Mexico, it would remove a major source of uncertainty that has weighed on confidence among businesses that borrow from banks.

“We currently have tailwinds,” Mr. Ahmed said. “Geopolitical trends are always important as we look at our cross-border as well as our global wholesale businesses, and I think we’re right now feeling that the environment is quite good.”

For the third quarter, TD reported profit of $3.1-billion, or $1.65 a share, compared with $2.8-billion, or $1.46 a share, in the same quarter last year.

Adjusted to account for special items, TD said it earned $1.66 a share, three cents better than analysts had expected, according to data from Thomson Reuters I/B/E/S.

“In our view, TD has followed a very strong [second quarter] with another relatively solid third quarter,” said Steve Theriault, an analyst at Eight Capital Corp., in a research note.

It wasn’t all smooth sailing for TD, however. The bank’s capital markets arm suffered a steep decline in profit, which fell 24 per cent to $223-million – even as rival investment banks appear to be turning a corner. TD’s weak performance stemmed mainly from losses on trading deposits held on its balance sheet. “Because we hold these deposits to maturity, they will be volatile, they’ll go up and down, but in the end the ups and downs should net out,” Mr. Ahmed said.

28 August 2018

BMO & Scotiabank Q3 2018 Earnings

The Globe and Mail, James Bradshaw, 28 August 2018

Bank of Nova Scotia and Bank of Montreal are doing brisk business lending in international markets, helping drive third-quarter profits higher despite worries about potential upheavals in international trade.

The lenders each posted double-digit percentage gains in profit from international operations during the three months that ended July 31 – excluding some one-time costs – partly because of robust growth in loans to businesses, as well as lower foreign tax rates.

Banking outside Canada continues to be strategically vital to Canada’s largest financial institutions, which are keen to tap foreign markets that can provide faster profit growth than the saturated Canadian banking industry. The booming third-quarter returns from abroad for Scotiabank and BMO come as trade tensions appear to be on the cusp of easing. The United States and Mexico reached a bilateral agreement on Monday to resolve key sticking points in negotiations to revamp the North American free-trade agreement. Yet the talks are still mired in uncertainty as Canada rushes back to the negotiating table to address remaining stumbling blocks and try to salvage a trilateral deal.

“I think [Monday’s agreement] was certainly a solid step in the right direction,” said Brian Porter, Scotiabank’s chief executive officer, on a conference call with reporters. “This alleviates a bit of ambiguity in the market’s mind. And we look forward to the next piece of NAFTA being solved, hopefully in a number of weeks, and that’s with Canada’s inclusion."

Third-quarter profit from Scotiabank’s international businesses, which are concentrated in Latin America, was hampered by costs associated with a string of acquisitions the bank has announced over the past year, and fell 15 per cent year over year to $519-million. Excluding those costs, however, Scotiabank’s international profit rose 15 per cent, helped by strong results from Mexico, where a growing economy has boosted demand for the bank’s products.

Of four major banks that have reported results so far, including Royal Bank of Canada and Canadian Imperial Bank of Commerce last week, Scotiabank was the first to miss analysts' expectations for quarterly earnings a share, falling short by one cent.

Scotiabank has been bulking up in its four key international markets: Mexico, Peru, Chile and Colombia. The bank bought a controlling stake in Chilean bank BBVA Chile for $2.9-billion, and made smaller acquisitions in Peru and Colombia, which have growth potential thanks to younger populations and a rising middle class. In the third quarter, international loan balances rose 10 per cent, and 14 per cent in the bank’s core Latin American markets.

“I think that the market has been hyper-focused on the U.S., which is fine, but sometimes they forget what’s going on in other parts of the world,” Mr. Porter said.

At the same time, BMO’s U.S. footprint delivered another impressive quarter, with U.S. profit rising 36 per cent compared with the same quarter a year ago. Benefits from U.S. tax cuts contributed 14 per cent of the unit’s earnings growth, and projected loan losses eased. But BMO also increased its commercial loan balances by 13 per cent at a time when most of its American peers have seen their respective growth in that category flatten.

“It’s [approximately] double the growth rate of our competitors in the U.S.” in commercial loans, said Tom Flynn, BMO’s chief financial officer, in an interview. “In the last year, we focused on expanding the number of industries that we specialize in, and that’s given us new markets to grow into. And we’ve also opened up some new offices in other parts of of the U.S.”

Over all, Scotiabank earned $1.9-billion, or $1.55 a share, in the third quarter, compared with $2.1-billion, or $1.66 a share a year ago.

The bank also absorbed $453-million in pretax costs – $320-million after tax – relating to a series of six deals totalling $7-billion that it has struck since last fall, some of which have yet to close. Adjusting to exclude one-time deal costs, Scotiabank earned $1.76 a share, just shy of the $1.77 consensus among analyst polled by Bloomberg LP.

Scotiabank also increased its quarterly dividend by three cents, to 85 cents a share. But its share price still fell 1.8 per cent to $76.89 on the Toronto Stock Exchange on Tuesday.

“We viewed [Scotiabank’s] performance as tepid,” National Bank Financial Inc. analyst Gabriel Dechaine said. “The big-picture perspective, though, revolves around the bank’s active M&A year.”

By contrast, BMO’s profit surged 11 per cent to $1.5-billion, or $2.31 a share, compared with $1.4-billion, or $2.05 a share, in the third quarter last year.

Adjusted for special items, BMO said it earned $2.36 a share, whereas analysts expected $2.26 a share, according to Bloomberg, and BMO’s share price inched 0.2 per cent higher.

Even amid a slowing mortgage market, profit from both banks' core Canadian banking operations continued on a path of steady growth over the past year, up 8 per cent to $1.1-billion at Scotiabank, and rising 5 per cent to $642-million at BMO.

And both lenders made strides in controlling costs, which is a high priority as they increase spending on digital initiatives. Scotiabank improved its efficiency ratio – which measures expenses as a percentage of revenue – to 52.5 per cent, from 53.3 per cent a year ago. And BMO, which has lagged its peers in this category, shaved its efficiency ratio to 61 per cent, from 63.1 per cent last year, with help from a $260-million restructuring charge recorded last quarter.

23 August 2018

CIBC Q3 2018 Earnings

The Globe and Mail, James Bradshaw, 23 August 2018

Canadian Imperial Bank of Commerce is finding ways to squeeze higher profit from its domestic banking business, calming concerns about sluggish mortgage growth as housing activity slows.

CIBC’s Canadian mortgage balances grew only 3 per cent in the third quarter, down sharply from an aggressive 12-per-cent growth rate a year ago. Even so, earnings from CIBC’s domestic retail bank rose 14 per cent in the fiscal third quarter, as the bank added loans and deposits that generated wider spreads thanks to rising interest rates in Canada and the United States.

Canada’s fifth-largest lender was the second bank to report better-than-expected profit in the three months that ended July 31, after Royal Bank of Canada kicked off earnings season with strong growth on Wednesday. All Canadian banks are affected by a slowdown in the country’s largest housing markets, where activity has been constrained by tougher regulations. But a solid economy with low unemployment rates set the table for another smooth quarter, and each of CIBC’s main business lines delivered, boosting total profit by 25 per cent year-over-year.

“We’re on a path to transform our bank,” said Victor Dodig, CIBC’s chief executive, on a conference call. “I think our results speak for themselves.”

CIBC is more heavily exposed to the Canadian economy – and to the mortgage market in particular – than its peers, and that has weighed on the bank’s share price as investors fret about a future downturn. For years, CIBC had added loans to its mortgage book much faster than other Canadian banks as it moved away from relying on third-party brokers, and replaced them with an in-house team of mobile advisers. But now, the pendulum has swung and CIBC’s mortgage balances are growing more slowly, compared with its rivals.

Facing stiff competition, the bank’s Canadian mortgage balances were essentially unchanged from the second quarter, although the bank’s executives see early signs that activity could pick up again as clients start to get more comfortable with higher interest rates and new stress tests on mortgages.

“What we had guided to was that over time, we would converge to market [rates of] growth,” said Kevin Glass, CIBC’s chief financial officer, in an interview. “These are very big operations that cannot be calibrated to the single mortgage origination. So I think that over time, you're going to see some pluses and minuses.”

CIBC reported third-quarter profit of nearly $1.4-billion, or $3.01 a share, compared with $1.1-billion, or $2.60, a year ago.

Adjusted for one-time items, which included costs related to last year’s US$5-billion acquisition of Chicago-based PrivateBancorp Inc., CIBC said it earned $3.08 a share. Analysts surveyed by Bloomberg LP were expecting $2.93 a share, on average.

The bank also raised its quarterly dividend by 3 cents to $1.36 a share, after buying back 1.75 million shares during the quarter.

In spite of continuing worries about free-trade negotiations and tariff wars, profit from Canadian commercial banking and wealth management climbed 20 per cent from the same quarter last year, while loan and deposit balances each increased 10 per cent. “We’re very conscious of the uncertainties and challenges related to trade protectionism that face us and face our clients,” Mr. Dodig said. “My own belief is that rational minds will prevail.”

CIBC also continued to build its U.S. arm faster than expected. Third-quarter profit from U.S. commercial banking and wealth management rose 295 per cent to $162-million – thanks to the inclusion of PrivateBancorp, which was acquired late in the third quarter of 2017. That unit, since rebranded as CIBC Bank USA, contributed $121-million in profit, up 29 per cent from the prior quarter, thanks to rapid growth in loans and deposits. In total, U.S. earnings accounted for nearly 16 per cent of CIBC’s total profit, putting the bank ahead of schedule as it pushes to generate 17 per cent of overall profit in the United States by 2020.

In the Caribbean, however, things didn’t go so smoothly for CIBC. In June, Barbados announced plans to restructure its sovereign debt, and CIBC subsidiary FirstCaribbean International Bank is heavily exposed to the government of Barbados through securities and loans, according to public filings. That prompted CIBC to increase provisions for credit losses – the money the bank sets aside to cover bad loans – by 15 per cent to $241-million.

Shaky Caribbean loans aside, CIBC’s credit portfolios showed few signs of stress: Net write-offs on residential mortgages, credit cards and personal lending in Canada remained low, despite speculation that Canada may be entering the later stages of a business cycle. “There’s nothing that we see that would indicate a cliff coming up,” Mr. Glass said. “The economy continues to be strong, the outlook continues to be solid.”

19 August 2018

Rising Interest Rates Expected to Boost Bank Earnings & Payouts

The Globe and Mail, David Berman, 19 August 2018

Concerns about the Canadian housing market have been weighing on bank stocks this year, and it’s likely that these concerns will be a focal point for investors as the big banks roll out their fiscal third-quarter results starting this week.

Royal Bank of Canada will kick things off on Wednesday morning, followed by Canadian Imperial Bank of Commerce on Thursday. Next week, Bank of Montreal, Bank of Nova Scotia and National Bank of Canada will report their respective results, with Toronto-Dominion Bank closing the reporting season on Aug. 30.

The outlook is upbeat, even as Canadian personal-debt levels have climbed to record highs and regulators have introduced new rules to dampen the housing market.

Analysts expect earnings per share will rise about 9 per cent, year over year. And income-loving investors can look for dividend hikes from RBC, CIBC and Scotiabank.

Some of this optimism springs from recent interest-rate hikes by central banks. The U.S. Federal Reserve has raised its key rate twice this year, with another two rate hikes expected before the end of the year, while the Bank of Canada raised its key rate in July, marking the fourth hike in about a year.

Higher rates tend to expand profit margins on bank loans if the rates that banks pay on deposits remain relatively unchanged.

As Robert Sedran, an analyst at CIBC World Markets, explained in a note: “We are still at a point in the economic cycle where rate hikes benefit the banks.”

He added: “One day, these will become neutral and, eventually, negative, but there have been few warnings signs flashing to signal that those days are upon us.”

This is the area where investors will probably focus their attention, though. The good news: Recent trends point to ongoing expansion of lending activity, albeit at a slower pace.

Based on Canadian regulatory data, RBC Dominion Securities analyst Darko Mihelic noted that domestic real estate-secured lending growth among large Canadian banks was 4.5 per cent in May, year over year, down from 6.1 per cent a year ago.

“We continue to assume mortgage growth for the large Canadian banks will slow to approximately 2 per cent (annualized) on average over our forecast period,” Mr. Mihelic said in a note.

But add in efficiency gains at the largest banks, which should pick up through the second half of the year, and he expects earnings from Canadian personal and commercial banking – the bulk of bank operations − in the fiscal third quarter will rise by an average of 6 per cent, year over year.

Add in stronger growth from the U.S. operations of BMO and TD, in particular, and Mr. Mihelic sees the banks reporting average overall earnings growth of 10 per cent, year over year, which is slightly better than the consensus.

Despite the upbeat outlook, and strong profit growth in previous quarters – earnings per share rose 13 per cent in the second quarter, year over year − bank stocks have been struggling throughout 2018. The S&P/TSX banks index is up 1.7 per cent this year.

“They have underperformed their own earnings growth so far this year, but we expect the earnings progress to be more closely reflected in the shares in coming months,” Mr. Sedran said in his note released last week.

That will depend, though, on whether investors see the third-quarter financial results as an indication that things are still going well for the big banks or as a final hurrah before trouble emerges in the Canadian housing market.

Doug Young, an analyst at Desjardins, estimates that earnings will rise by 7 per cent on average.

“Not bad, right? But will the market care, or will the focus remain on the prospect of slower mortgage loan growth, highly indebted Canadian consumers, credit trends that one could argue probably can’t get any better, etc.?” Mr. Young said.

Investors will soon get an answer.

17 August 2018

RBC Whistleblower Protections Under FCA Scrutiny

Financial Times, Katie Martin and Caroline Binham, 17 August 2018

Whistleblower protections at Royal Bank of Canada are under scrutiny by the UK’s Financial Conduct Authority, after a former trader at the bank won his case for unfair dismissal and at least five more potentially similar cases came to light.

The London-based RBC staff involved claim to have been dismissed without due process after highlighting legal and compliance problems across a range of businesses in cases spanning several years, multiple people familiar with the matter told the Financial Times.

The FCA scrutiny comes at a time when the regulator is keen to demonstrate it takes the treatment of whistleblowers seriously. In May, it imposed an unprecedented fine on Barclays chief executive Jes Staley after he tried to uncover the identity of a whistleblower. He became the only chief executive of a major financial institution to be fined by the FCA and keep his job.

“Whistleblowers play an important role in exposing poor practice in firms and they have in the past few years contributed intelligence crucial to action taken against firms and individuals,” the FCA said in a statement while declining to comment on the nature of its inquiries into RBC.

“It is in the interests of the industry and regulators alike that wrongdoing is identified and addressed promptly. For individuals to have the confidence to come forward, it is vital that firms have in place adequate policies on dealing with whistleblowers and that a senior manager takes responsibility for overseeing these policies,” it added.

The interest in RBC comes after John Banerjee, once the head of emerging markets currency trading at the bank in London, won a tribunal case for unfair dismissal in May. Mr Banerjee successfully argued that the bank had fired him unfairly after he drew attention to a “box-ticking” compliance culture. The judge in the case described the bank’s actions as “egregious”. The bank is appealing the case.

RBC declined to comment. After Mr Banerjee’s tribunal, however, it said it took its duties as an employer “very seriously” and was "reviewing the judgment carefully to see whether there are any practical steps it should take to make improvements to any employment processes".

The FCA rarely concerns itself with individual tribunal cases. But one person familiar with the regulator’s thinking said it is interested in exploring potential patterns of poor behaviour in the treatment of whistleblowers.

No suggestion has been made that RBC has a more serious problem in this regard than any other bank. However, concern about how whistleblowers are treated has reached the highest levels of the FCA. Andrew Bailey, its chief executive, has met Georgina Halford-Hall, the head of campaign group Whistleblowers UK, to discuss potentially suspect patterns of departures of individuals who have raised compliance issues at a number of banks, including RBC.

The FCA still has some way to go to convince bystanders that it is tough on poor treatment of whistleblowers. Many criticised it for not banning Mr Staley over what was a test case of tough new rules that aim to hold top management accountable for failings on their watch.

The regulator received 1,106 whistleblowing reports in the 2017-2018 financial year. That is more than the previous year’s 900, but still well below the 1,340 recorded in 2015-2016. Of the 1,106 disclosures made in the last financial year, the FCA is taking further action in 121 cases. It is assessing a further 128 disclosures, according to its annual report published last month.

Whistleblowers are often very aware of the risks of talking to regulators. “While people are encouraged to come forward by the FCA, you really need to think twice or three times before speaking with them,” said one employment lawyer who represents both traders and banks. “They can’t guarantee anonymity, or that your name somehow won’t come out as the investigation progresses; even with the best of intentions, it’s often very obvious who a whistleblower is. And a bank really won’t touch you once it knows you’ve blown the whistle.”

07 August 2018

Why 2017′s Top TSX Stock Picker Says It’s Time to Avoid the Bank Sector

The Globe and Mail, Tim Shufelt, 7 August 2018

There are times when Canadian bank stocks trade more or less in unison, making it difficult to pick the winners from among the group. Last year was not one of those times.

With the oil market still trying to reconcile a global oversupply, the spring of 2017 saw the near-collapse of alternative mortgage lender Home Capital Group, bringing renewed scrutiny upon the Canadian housing market and, by extension, the banks.

“Those twin catalysts ended up creating an opportunity that frankly doesn’t always present itself in the banks,” said Robert Sedran, a bank analyst at CIBC World Markets.

Fast forward to now, and the analyst is waiting for the next jolt to the market to create some separation in the pack. “This isn’t the point of the cycle where we’d advise investors to jump into the sector aggressively,” he said.

Mr. Sedran’s keen timing earned him the distinction of being last year's top Canadian stock picker, as conferred by the Thomson Reuters StarMine Analyst Awards.

The awards rate sell-side equity analysts based on their investment recommendations for the companies they cover.

Each analyst's ratings are compiled to create a hypothetical portfolio. Performance is measured by the return that portfolio would have earned if an investor had followed the analyst's "buy" and "sell" recommendations.

Mr. Sedran’s picks would have generated an excess return of 16 per cent over the industry benchmark in the 2017 calendar year.

He credits most of that outperformance to calling the bottom on Canadian Western Bank.

In April, 2017, concerns about mortgage fraud among Home Capital’s network of brokers caused a run on the bank’s deposits and provided new fodder for Canadian housing bears.

“International investors were looking at the Canadian housing market and wondering if this was the match that finally lit the fuse. We felt strongly that it was not,” Mr. Sedran said.

One of the indirect casualties of the Home Capital debacle was Canadian Western, which was already being targeted for having considerable exposure to the energy sector. With Canadian Western shares down by 24 per cent over the previous six months, he slapped a buy on the stock in early June, 2017, just in time to catch a move upward in excess of 65 per cent over the next several months.

“A gain like that in a bank stock doesn’t happen very often,” Mr. Sedran said.

Canadian banks in general remain resilient to the slowdown in housing, which Mr. Sedran credits to the strength of the broader economy.

Though demand has fallen back as rates have risen and mortgage regulations have tightened, sellers are not generally motivated to accept lower prices as long as the economy is growing and unemployment is low.

“So there’s a decline in volume and perhaps the beginning of that fabled soft landing,” he said.

And though mortgage growth has slowed, the banks have enjoyed a built-in offset from rising rates, which help to improve profit margins.

“We think the profit trajectory for the banks is a pretty good one, at least until the next recession,” Mr. Sedran said.

The two names he expects to post above-average earnings growth over the next year are Toronto-Dominion Bank and Bank of Nova Scotia. Investing for superior earnings might be a better bet than looking for the group to benefit from multiple expansion, he said.

“We think we are late-cycle,” he said. “Now is the time to be a little bit more patient and cautious and wait for one of those dislocations.”