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Despite the turbulence caused by COVID-19, Canada’s top banks have reported fairly solid earnings this quarter. As the country settles into a new reality, could these improving results point to a similar story for the economy? Stu Kedwell, Co-Head, North American Equities, joins Dave for a recap of the banks’ earnings reports, and what to look out for ahead. (Recorded September 8, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson, back from vacation. So sorry, we were off a couple of weeks, but back today with Stu Kedwell and Stu’s Days. Stu, welcome back.

Hi, Dave. Thanks for having me. I hope you had a good vacation.

Great vacation! Sorry to let you down the last couple of weeks. I know what a lot of regular listeners look forward to each quarter, because you’re one of the foremost experts in this area in the country. Your thoughts on bank earnings? A couple of weeks ago, we did a little bit of a preview of what you thought might be coming or what we might see in the bank earnings. But now that all the major Canadian banks have reported, what did you call out of those reports that you think is interesting for investors?

Great. Well, I thought generally they were kind of in line with what we were expecting. Sometimes the numbers are a little bit higher, or a little bit lower. And you have to get into the financial statements to see what’s really going on. I thought some of the key considerations. First and foremost, the capital ratios of the banks were very robust. We’ve talked a lot about that in the past, because when you’re in a period where the earnings can bounce around, capital is really important because it leads you to believe that whenever we might get to the other side of this, the risk of a bank having to issue capital is substantially lower when they’re that healthy. In fact, two of the banks that had their dividend-on-dividend reinvestment -- Bank of Montreal and TD Bank -- their capital positions actually were so good that they took their dividends off that plan. So that leaves the entire sector without using the dividend reinvestment. [This] means that bank management feels pretty good about their current capital ratios. The second thing that you look for, which bounces around like crazy, is provisions for credit. And again, that was a bit of a pleasant surprise. The banks make estimates based on what they see in the economy, and come to decisions on whether or not they’re appropriately provided for everything they see. Many of the banks saw slightly lower provisions than analysts were looking for. So, again, along the lines of capital, they feel pretty good about their allowances. The number one question, that was on the majority of the conference calls, was how will the deferral programs go as they start to come to the end in the fourth quarter? Which of those deferral loans will actually go sour and how the banks deal with that? But again, I think on the whole, the banks felt reasonably well positioned to deal with all that. From a longer-term standpoint, the things that we pay very close attention to are the net interest margins, which have been significantly impacted by this low interest rate environment. A couple of things there. First, it’s not likely to get better any time soon, but many of the banks said it’s also not likely to get worse. So while we might drift down a little bit, this time next year, we’ll have annualized the worst of the compression and the net interest margin. And then, the two other sources that we look for is loan growth and non-interest income. Loan growth was pretty good on the mortgage front. We’re going to have to see how that comes together into 2021 and 2022 as the economy recovers. On the non-interest front, some areas bounce back quite nicely, like some credit card spending, and what have you. Trading was spectacular. That’s not likely to persist at these levels. So, all in all, a pretty reasonable quarter. I think investors were comforted by the high capital ratios, but we still have to deal with a bit of uncertainty as to when bank earnings recover. We’re still looking at late-2021, or 2022 for the sector. And that was generally consistent with what we were at going into the report.

Yes, I think if someone plays the tape from our previous recording, that’s exactly what they would have heard from you. In terms of what this says about the strength of the economy and the progress that the Canadian economy has made. The recovery from the full shutdown of the economy - and maybe even extrapolated over to how the US economy is recovering as well. What do you think the bank earnings signal around our progress back towards a normalization of the growth we were experiencing before?

Well, it’s very consistent with what Eric [Lascelles] has been saying. There’s a good chunk of the economy that comes back quickly, and there’s another chunk of the economy that comes back more slowly. A little hard to say here, because I think we’re all a bit anxious as we get into September, and how school reopenings go, and what have you. Definitely a topic of conversation in our household over Labour Day. So the economy is bouncing back. The government, the programs that are trying to provide support -- everyone is very focused on how those will mature. Everyone seems quite committed to it. So, the economy is bouncing back, but a lot of the easy part of that recovery has taken place a little bit. So it’s going to be a bit more of a grind from here.

Which can create a little bit more volatility in markets. We’re seeing that over the last few days. And it comes back to one of your favorite strategies, which we’ve talked about a few times on the podcast: dollar cost averaging for investors.

Yes, one hundred percent. We’ve talked about where the level of markets are, relative to fixed income, where real interest rates are, which are effectively negative at this level. So trying to turn the volatility into your friend as we go through school reopenings, and as we go through some political uncertainty. Having a roadmap in front of you that you stick to during that period of time can be highly beneficial to your long-term investment plan. So that also is still a hundred percent true.

Yeah, and it certainly appears as if we’re going to go into a period with, once again, some elevated volatility. Stu, thanks as always. And we’ll look forward to maybe digging more into some of this volatility, and what we’re seeing in different parts of the market when we connect with you next week. But thanks again.

Great. Thanks, Dave.


Recorded September 8, 2020

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