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While Q1 earnings reports of many Canadian and U.S. businesses may not reflect the full impact of COVID-19, there is still a lot to learn from these statements. Stu Kedwell, Co-Head, North American Equities, RBC Global Asset Management, covers some of the key trends to consider, including a focus on companies’ balance sheets.


Hello and welcome to the Download. I’m your host, Dave Richardson, and I am back with Stu’s days today with Stu Kedwell. Stu, welcome back.

Hi Dave. How are you doing? Thanks for having me.

Very well. And we’re now through the entire month of April and into early May, which is the prime earnings reporting season in the U.S. and in Canada. As the co head of North American Equities at RBC Global Asset Management, what do you take away? Is there anything that stood out in the earnings report, the overall trends, that help us make sense of what’s going on in the market now and potentially down the road?

Yeah it’s been something that we’ve been thinking a lot about. As you point out many U.S. and Canadian companies have now reported their earnings. And not surprisingly, we didn’t glean a lot from what companies reported in the first quarter because Covid really only impacted a couple of weeks of the first quarter. So most of the focus has been on the balance sheet and the liquidity that these companies have to get them through this period where the economy is really shut and quite slow. So we’ve been very focused on that. And I would say that many of the businesses that we own have quite reasonable balance sheets and are well positioned to get through this. The second thing that people have been focused on, there are certain areas of the economy that e-commerce and trends that might have been in place, have really accelerated. And that’s created a fair amount of optimism in the stock market on some of these stocks. But we’re still trying to ascertain how persistent will these trends be once the economy gradually reopens. And then the third thing is: trying to understand if the businesses and the earnings power that they had, say, in 2019, is that still generally intact when it comes to 2021, 2022? And, again, I would say that this is still generally true. So it hasn’t been as an impactful earnings season as you might expect, because it was pretty well expected going into it.

So not a ton of learnings from the reports, but some of the forward looking statements and the lack of clarity from those statements, you’re trying to understand how this is all going to play out. One of the things that is coming up in May that is significant, particularly with your work on the Canadian dividend fund that you’ve managed for a number of years, is bank earnings in Canada. And TD was out with an announcement on loan loss provisions in the U.S., — they’ve got significant holdings as a Canadian bank in the U.S. Was there anything you took away from that?

Yes, it’s a good point. The U.S. divisions of Canadian banks have what’s called a call report, and that’s reported on a calendar of quarterly basis. So we get a little sightline into their U.S. businesses before they actually report their entire bank results. So TD Bank’s call report came out last week and the bank put a press release out detailing their provisions for credit in their U.S. banking business, which were quite large, — quite large, but not shockingly large, relative to where expectations have been. So we’ve seen bank estimates, the earnings power for this year come down 25, 30, 35 %, depending on the analyst, and that’s where expectations really are rooted. And in fact, when TD put this announcement out, their stock was actually up a little bit on the day. So it kind of reflects the flavour of where we’re at, which is, that everyone knows there’s going to be a bumpiness in the economy, and a big bank taking a large amount of provisions for credit is not really that surprising, given everything we know. As we go through this first quarter with the Canadian banks, there will be large provisions for credit. And the reason they’re large is not so much that all these loans have gone bad, but the way the accounting works, they have to put up what they call provisions for performing loans. And it’s kind of a way of trying to get in front of it. And that’s what we’re going to see this quarter. But as I said, it was a very large number, I think was about a billion and one, just for the U.S. business, but it wasn’t out of the realm of expectations that bank investors have been discussing.

And this is something that we’ve talked quite a bit about with various guests on this podcast, this hole for investors. What seems like a disconnect between what you’re hearing about with respect to the health crisis and the economy, and then the market which, after a massive drop in March, has rebounded quite strongly since then. And it just seems like as bad news comes out, the market actually reacts the opposite way you’d instinctively think, and that’s because of the market’s forward pricing mechanism. And a lot of this news is looking backward. So Stu, thank you, as always, for your insights. We’ll be back next week and we’ll take a look at where we’ve progressed since today. So thanks for your time.

Thanks, Dave.


Recorded May 12, 2020

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