It’s that time of year again. Canadian bank earnings.
As cornerstones of many investor’s portfolios, this is often the most popular newsletter of the year. I’ll dive into each of the Big 6 Banks and their earnings, then dive into key performance indicators and overall outlooks for the banks.
Because these newsletters tend to run long, I won’t be making any comments on my portfolio moves this week. To see the moves I’ve made, simply log in to your Stocktrades Premium account and select “Dan’s Portfolio” from the menu.
Let’s dive right into it.
Toronto Dominion Bank (TSE:TD)
As you can see above, TD had a rock-solid quarter on a headline basis. You’ll notice GAAP earnings and EPS are vastly different. This is because the company reported a large chunk of earnings due to the sale of its Schwab shares. When you adjust them out (and you should, because it is a one-time gain), you get to the $1.97 figure.
The bank is still struggling to a degree, with earnings down year-over-year. Revenue continues to climb; however, expenses are outpacing the climb, resulting in earnings taking a hit.
These expenses are largely due to the anti-money laundering situation it has put itself in. It expects continued costs for the next couple of years.
The Canadian side of the business continues to be strong, with deposits up 5% and loans up 4%. The interesting thing here is that a large chunk of the overall growth came from the business lending side, highlighting how much consumers have scaled back borrowing. Wealth management and insurance grew by double digits, and despite some pressures on expenses and the overall asset cap, its US side is performing well.
I’ll speak more in detail about this in the provision section for all the banks, but TD is starting to see them accelerate this quarter due to tariff and economic uncertainty.
The company continues to sell off US assets. The cap on assets placed on TD was effectively the exact number of US assets it held at the time. So, in order to avoid being handcuffed when it comes to lending, it is creating a buffer by selling off assets.
The bank has had a strong run over the last while. However, I’m still not personally convinced it will be able to outperform the other major players like National Bank and Royal Bank.
Bank of Nova Scotia (TSE:BNS)
Scotiabank’s struggles never seem to go away. The bank reported a bottom line miss and the overall numbers point to a bank that is struggling while many of the other Big 6 are thriving.
Earnings per share were down by 4% year-over-year and return on equity dipped by 1.3% over the same timeframe. Although overall revenue is increasing on a year-over-year basis (9%), higher provisions and weaker margins are continuing to impact the company.
Its Canadian banking segment saw revenue increase by 2%, but the difficulty here is expenses increased by 4%, plus a massive surge in provisions for credit losses caused net income in the segment to decline 31% year-over-year. Loans increased by 4% and deposits by 5%.
On the international side of things, revenue was flat year-over-year. However, provisions for credit losses are a bit more stable in this segment, which resulted in a 6% increase in net income. The only difficulty here is they reported a decline in both loans and deposits, which is certainly cause for concern.
Overall, many of the banks are reporting higher provisions, but overall growth is outpacing those provisions. For Scotia, they’re not doing enough operationally to offset this.
I am not really a fan of the bank, and I’m not sure what they can do here to turn things around.
National Bank (TSE:NA)
National continues to impress me with yet another double-digit beat on earnings expectations. Overall earnings are up by 12% year-over-year despite accelerated provisions for credit losses, and it looks like the Canadian Western acquisition is already starting to pay dividends for the company.
Revenue was up 33% year-over-year, but a huge chunk of that growth was due to the integration of Canadian Western.
The company’s financial segment reported a 56% increase in net income. Considering the current state of the equity markets, it’s really not that surprising to see this portion of the business doing so well. When we look to the personal and commercial banking side of things, deposits were up 9%, while loans were up 3%.
Much the same as TD Bank, National is reporting a relatively strong increase in commercial loans, up 14% year-over-year, but a relatively slow environment for personal loans and mortgages. There is a lot of uncertainty regarding the Canadian economy, unemployment, tariffs, etc., and Canadians are clearly scaling back their willingness to spend.
The company’s guidance for 2025 calls for mid-single digit earnings growth and a return on equity of around 15%. This is interesting because the company also issues medium-term targets, for which it expects 5-10% earnings growth and 15-20% returns on equity.
Because their 2025 guidance is coming in on the bottom end of both of these, it is easy to come to the conclusion that National does expect the environment to improve over the next few years.
Overall, my opinion of the bank is the same as when I added it to the Bull List. I view it as one of the highest quality banks in the country.
Bank of Montreal (TSE:BMO)
It was a solid quarter for BMO, who has struggled over the last two years or so due to rising provisions. In fact, this was the first time the company had beat earnings expectations in over two years, and it did so in a big way.
However, there are still some underlying signs of struggling operations from the bank. The company reported a decline in revenue and profits across both its Canadian and US banking sides. While one could come to the conclusion that this is simply the nature of all the banks in this environment, we just don’t see that with institutions like National.
Wealth Management and Capital Markets continue to do well. Higher trading volumes and client inflows continue to drive results in this area for not only BMO but most all of the banks. This is a segment we can expect to be a bit more cyclical relating to the market, but it is certainly providing a bit of a buffer from some operational difficulties.
Return on equity continues to dip, now sitting at 9.8% versus 10.9% last year.
Overall earnings were up on a year-over-year basis by double-digits, but that is primarily due to the fact that BMO was reporting much higher than expected provisions last year. However, I’ll speak more about that in the provision section of the email.
It was a good quarter from BMO relative to what it has been reporting in recent years. However, it still has a long way to go until I would call this one’s turnaround successful.
Royal Bank (TSE:RY)
It was a relatively rare quarter for Royal Bank, missing on top and bottom line estimates. This is nothing overly concerning as the misses were fairly small, but Royal hasn’t missed on both analyst targets for years now.
It is much the same story as any other bank, provisions are putting a bit of pressure on earnings. However, more on that later.
Top and bottom line growth from Royal is still one of the best in the sector, with revenue up 11% year-over-year and earnings up 7%. The company is realizing some of the fastest deposit rate growth out of the Big 6 banks, highlighting how strong the brand truly is.
In terms of the commercial side of the business, there has been some strong growth. The company had 9% loan growth and 10% deposit growth. The company mentioned that it is seeing some tempered activity among clients in the automobile and transportation space, but the fact it can still put out double-digit growth is bullish for when the macro environment reverses.
Overall, it was a solid quarter from the bank, but it went through a bit of pressure post-earnings. I do feel this is likely because of the valuation of the bank, which is primarily why it was removed from the Foundational Stock list and replaced with Intact Financial. I continue to hold Royal and have zero plans to ever sell, but because of its strong run of results, it is no doubt trading at a premium valuation.
CIBC (TSE:CM)
I have to hand it to CIBC. I’ve never been a large fan of the bank and likely will never be due to their heavy residential real estate exposure here in Canada, but they’ve put up some outstanding results over the last year. This quarter now marks 7 straight quarters in which CIBC has beat estimates on the top and bottom line.
The company’s earnings have increased by 17% year-over-year, primarily due to a deceleration in provisions, but also due to some strong activity in its commercial banking and wealth management segments. Revenue grew by 13% and earnings by 14% in this segment. If we look to US commercial banking growth, it was even better, with double-digit growth in both earnings and revenue.
On the personal side of things it was a bit slower, but this has been pretty typical across all banks. Consumers just aren’t spending what they used to and the housing market is seeing a bit of a slowdown. For a bank with heavy reliance on this area, this shouldn’t be all that surprising.
My ranking of the bank’s quarters
Members appreciated this last time, so I’ll provide a quick outlook as to my opinion on the banks earnings, in order of best to worst:
- CIBC
- National Bank
- Bank of Montreal
- Royal Bank of Canada
- Toronto Dominion Bank
- Bank of Nova Scotia
Bank KPIs
Now, I will dive into my thoughts on some industry-wide numbers and key performance indicators from the Big 6. I was considering less of a focus on provisions as I have heavily focused on them in the past, but they were definitely the highlight of the quarter yet again, so let’s get to them.
Provisions for Credit Losses
A note on the provisions for National Bank. The numbers are elevated this much because of the acquisition of Canadian Western Bank. They needed to absorb all their provisions. So, don’t be alarmed by the numbers. Instead, focus on the allowance for credit loss ratio (ACL Ratio), in which it still leads all major banks.
Another quick note: Provisions for Credit Losses is money put aside this quarter, while Allowance For Credit Losses is cumulative. Think of PCLs as the money you’re putting in the piggy bank every quarter, while the allowances are the money that has accumulated throughout the years.
When we look to banks like Scotia, TD Bank, and Bank of Montreal, they’ve been the 3 biggest banking laggards over the last while. When we look to their ACL ratios, this is a good indicator as to why. Ultimately, the more money they set aside for provisions, the more their earnings will be impacted.
While TD and Bank of Montreal seem to have it somewhat under control, provisions continue to rise at an accelerated pace for Scotiabank. There is little question it has been the weakest performing bank over the last 7+ years, and it is difficult for me to see the company turning things around.
A portion of Royal Bank’s accelerated provisions, at least on a year-over-year basis, are also because of the HSBC addition as well. So, in this regard, it is important to look at their total ACL ratio, which comes in 2nd to only National Bank.
What I am seeing with provisions at this point in time is there has been a large shift from the banks reporting large impaired provisions to large performing provisions. Impaired provisions are loans that have had some sort of default already, while performing are loans that are still being paid but expect to go unpaid.
What this tells me is that the banks are uncertain of the forward environment, especially with the tariff situation.
What this also tells me is that provisions are going to be volatile based on the forward environment. Performing provisions are the easiest to pull back on depending on the forward environment, which will ultimately help earnings.
Dividends
It was a fairly normal quarter from the banks dividend-wise, so I won’t speak much on them. We saw every bank raise the dividend, outside of CIBC. However, CIBC looks to have moved to a single dividend raise at the end of the year.
During the pandemic, the company made multiple raises to the dividend every year. However, this was likely a result of the company having to freeze the dividend during the pandemic. I’d expect them to move back to regular annual raises at the end of the year.
The one interesting thing here is that Scotia has returned to dividend growth despite a relatively high payout ratio and declining earnings. This is the company’s first raise since 2023, as it lost its Aristocrat status amidst its struggles.
The only reason I can see right now for the dividend raise is the company believes the forward environment will improve and its payout ratio will normalize. However, a payout ratio north of 70% is unhealthy for a bank over the long term, and Scotia is now hitting nearly 87%.
Earnings projections
This is a segment of the overview I added a few quarters ago that many members appreciate, so I’ve decided to track it.
The “Expectations at the start of the year” are the earnings projections for the banks in 2025 from the start of 2025, and the “Expectations now” are what analysts figure the bank will earn in 2025 now.
It is not surprising to see banks like CIBC and BMO with a mid-single-digit increase in their expected earnings per share. They’ve posted some strong results over the last few quarters, and in terms of BMO, provisions have started to stabilize, which is causing analysts to revise their earnings projections upwards.
For Scotia, the struggles continue, and as a result, analysts are undoubtedly more bearish. This is why I’m puzzled that the company came through with a dividend raise, as I don’t really believe they are in a position to do so.
The one that does surprise me a bit is the decline in earnings projections for National Bank. The bank’s provisions have been escalating, but primarily due to the acquisition of Canadian Western. I’m not overly concerned here, as the bank is operationally strong.
Wrapping it up
I know this newsletter is long, as it usually is, but I hope it gives you a fairly comprehensive overview of the Canadian banks and their earnings.
I continue to hold what I feel are the two best banks in the country in Royal Bank and National Bank. In addition to this, I hold Equitable. However, outside of Scotiabank, I feel Canadian banks are all rock-solid companies to hold over the long term.
