As Canadians squeeze out the last days of summer, few are likely paying attention to the latest quarterly earnings reports from the big banks. Yet, the financial fortunes of just about everyone are tied to their success.
Millions of us own shares in the big Canadian banks directly or through company pensions, Canadian equity mutual funds or exchange traded funds (ETFs) in our registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), and even the Canada Pension Plan (CPP).
They operate as an oligopoly where profits are protected through government regulation and foreign ownership restrictions; leaving more for the masses who have few other choices among Canadian large-cap stocks.
Earnings seasons have worked out well for long-term retirement investors over the decades; generally resulting in yawn-inspiring profit growth that most often surprises by pennies above estimates, and regularly includes dividend increases.
The big Canadian banks currently pay annual yields between 3.5 per cent and 6.5 per cent and have not cut their dividend payouts since Confederation.
Since the early 1990s, shares in the Big Five banks - Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO) and the Canadian Imperial Bank of Commerce (CIBC) - have risen in value by 1,7500 per cent on average.
Cracks in the Canadian Banks
The big Canadian banks gained global fame for soundness after successfully navigating the 2008 global financial meltdown, but in the wake of a recent hike in global interest rates, they have been stumbling.
Benjamin Sinclair, an equity analyst with Odlum Brown, told BNN Bloomberg in a Tuesday interview that he remains bullish on the banks over the long term, but said he expects some of them to continue facing headwinds in the coming year.
He said BMO’s earnings miss, which sent shares down more than seven per cent on Tuesday, is the latest in a string of disappointing results as loan-loss provisions continue to eat into profits.
TD Bank kicked off third-quarter earnings season last week, posting its first quarterly loss in decades after taking a US$2.6 billion provision for fines related to money-laundering investigations in the U.S.
CIBC, meanwhile, managed to squeak out a profit this week after struggling with a series of problems in its U.S. commercial real estate portfolio.
Falling out of favour with Wall Street
The equity research analysts that advise big institutional investors have taken note.
According to analyst ratings compiled by Bloomberg, the once dominant ‘buy’ ratings have given way to ‘holds’, ‘sells’ and even a few shorts.
Only six per cent of analysts that cover Scotiabank think it’s a buy, with 69 per cent rating it a hold and 25 per cent telling clients to sell.
Buys and holds for CIBC are even at 35 per cent with a whopping 29 per cent slapping sell recommendations on the stock.
Nearly half of analysts rank TD Bank as a buy, but 41 per cent consider it a hold and 12 per cent have sell recommendations.
RBC - the global darling of Canadian banks - managed to secure 73 per cent buy ratings contrasted by 16 per cent sells.
‘Yes, the dividends are safe’
Paul Gardner, partner and portfolio manager with Avenue Investment Management, says the “decaying” return on equity has prompted him to seriously lighten the load on Canadian banks in his client portfolios.
He now holds only RBC, the strongest performing Canadian big bank stock over the past six months with a 22 per cent return.
He points to a variety of reasons for poor performance from the banks including rising costs due to inflation, extra regulatory and cyber security costs, and a slower economy.
He also blames a flat yield curve. Banks make their profits on the space between yields, and a flat curve leaves less of a difference, or spread.
Despite the turbulence in the latest round of earnings, he expects steady profits to return for the oligopoly and the dividends Canadians have come to rely on for income in their portfolios to continue flowing.
“Yes, they are safe,” he said.