This is the final quarterly earnings season for large banks in 2018, when Canada’s largest lenders turn to investors about how much money they make and where.
The Bank of Nova Scotia discarded all its quarterly results on Tuesday, showing that for the three months ending in late October, it earned $ 2.27 billion. The Royal Bank of Canada followed suit on Wednesday, publishing a quarterly profit of $ 3.25 billion over the same period.
Toronto Dominion Bank and CIBC numbers this morning and then the Bank of Montreal to close the quintet next Tuesday.
Large banks are considered canaries in a Canadian economic coal mine at the best of times, and this turn is observed even more closely than usual. Anyone trying to figure out how the winds blow for the Canadian economy is advised to pay attention to the fact that the bank numbers show about three key points.
How much oil do they have?
After the march, for most of the year, the oil market has fallen over the past two months, and Canadian oil has been stronger than any other type of crude oil. The price of the oil that receives the most attention is the US control sample, known as West Texas Intermediate, which has lost one third of its value since the beginning of October and is now trading at just $ 50 a barrel.
But much more important for the Canadian economy is a heavy blend of crude oil, known as Western Canada Select (WCS). Since the beginning of last month, it has fallen by 70%, and at one point it was trading with hands on less than $ 14 per barrel – less than it was worth doing.
"Oilmen, high-ranking in Western Canada, are at risk of facing significant cash flow degradation," the credit rating agency DBRS Ltd. warned on Wednesday.
This is bad news for banks, which also bring them money, so the topic of oil risks was for many analysts who monitor banks.
According to Scotiabank, on Tuesday it has $ 14.8 billion. The United States is in the form of loans for the energy sector, which is only about 2.6 percent of all loans on its books. Only about 1.2 billion dollars. The United States was granted to companies working with WCS, so the bank managers were confident in the future.
“We are very proud of the names we take on,” said Dieter Jensch, head of global banking and markets at Scotiabank, on the phone with analysts. "I am sure that this will survive the unsettled period."
Royal Bank announced that it has a similar amount of loans – $ 1.3 billion – to companies whose fortune is associated with the price of Western Canada Select. While the vast majority of these loans are still considered investment grade, RBC Chief Risk Officer Graham Hepworth noted that a significant portion of the fall in oil prices occurred only in the last few weeks, so the WCS beating will not be fully shown in the numbers ending in October That is why the bank expects that some “additional losses” are related to oil, which may appear in the current quarter, he said by telephone with analysts.
Although neither Scotiabank nor the RBC blinked with red warning signs regarding their impact on oil, it should be clear what other banks have to say on this topic.
How much do they have in the housing market in Canada?
Given their negative role in the mortgage market, the aggregate income of banks in the housing market in Canada is likely to be huge. But smart investors are paying close attention to whether this huge chunk becomes bigger or smaller.
The new rules of the mortgage "stress test", implemented at the beginning of this year, designed to complicate obtaining a mortgage, seem to have the desired effect. Scotiabank says its residential mortgage portfolio grew by only 0.4 percent during the quarter. This is a small part of what happened during the foamy years of 2016 and 2017, and the bank said it expects its credit book to increase only in the middle of one quarter next year.
While the numbers are slightly higher in RBC, they are moving in the same direction, as during the quarter its housing mortgage book increased by 1.4 percent. The bank still has mortgage loans worth more than $ 265 billion, but, like Skoatia, “growth is slowing,” said Mario Mendonca, an analyst at TD Bank.
Even if the golden mortgage goose does not lay so many eggs, the Big Five probably can still get higher returns from their existing customers due to higher mortgage rates. But if any of Canada’s other major banks issue fewer mortgage loans, this is something that Canadian homeowners will want to keep track of.
Are they confident enough to receive dividends?
The dividend reduction is generally not audible in Canadian banks, as many investors buy and hold shares for many years, only for the steady income they provide. Thus, management in banks, as a rule, only increases the size of these quarterly scholarships, if they are confident that they can support higher payments.
If there are any signs in recent history, we can expect some hikes in the near future. Since the beginning of 2016, none of the large banks that tracked Mendonca has passed more than two quarters in a row without a modest increase in their dividends. (The exception is TD, which prefers to raise its dividend at the beginning of the calendar year and keep it there for the next four quarters. If this is fair, expect an early growth, but not until the next quarter.)
In this quarter, Scotiabank and RBC both held their dividends where they were, but both expected them to stand, because the last time they raised them. If the two-quarter trend is fair, the BMO will announce the hikes next week, as they have not traveled for six months.
Overall, Mendonka said: “We expect banks to continue raising dividends at a healthy pace,” at about 8 percent, on average, this year and next.
If this happens, it is a good sign for investors that banks feel confident in the future, even when remote storm clouds begin to rumble through the Canadian housing market and an oil field.