Category: Uncategorized

TD Bank tops quarterly profit forecasts

Toronto Dominion Bank TD-T +0.74%increase reported lower third-quarter earnings as costs rose faster than revenue and the bank set aside more loan loss provisions, but is starting to reap the benefits of rising interest rates in its core retail banking operations.

TD earned $3.21-billion, or $1.75 per share, in the quarter that ended July 31. That compared with $3.54-billion, or $1.92 per share, in the same quarter last year.

But TD’s earnings were affected by an interest rate hedging strategy implemented as the bank works to close its US$13.4-billion acquisition of U.S.-based bank First Horizon Corp., which created a net loss of $678-million.

Adjusting to exclude the hedging costs and other items, TD said it earned $2.09 per share, above analysts’ consensus estimate of $2.04 per share.

TD and CIBC’s net income margins, Canadian retail segment

The bank kept its quarterly dividend unchanged at 89 cents per share.

Among the five major banks that have reported earnings so far, TD is the third to surpass earnings estimates. Banks have been stockpiling provisions for credit losses – the funds set aside to cover loans that could default in future – in a reversal after a string of recent quarters in which they recovered loan loss reserves built up early in the COVID-19 pandemic.

In the fiscal third quarter, TD set aside $351-million in provisions, which was less than expected. Of that, $11-million was earmarked against loans that are still being repaid.

“This might be the first bank where we could view their reserve build as a little on the ‘light’ side,” said Darko Mihelic, an analyst at RBC Dominion Securities Inc., in a note to clients.

TD’s chief financial officer, Kelvin Tran, said in an interview that the bank updated some of its economic models to be more conservative. “There’s a lot of uncertainty in the market and we’re going to have to see how it plays out,” he said.

TD reported rising profits from retail banking, its core business, as it starts to benefit from rising interest rates. In Canada, retail profit was up 6 per cent to $2.25-billion, with loan volumes up 9 per cent. And in the U.S., retail profit rose 11 per cent to $1.44-billion.

TD is the most sensitive to interest rates of the major Canadian banks, and as central banks have rapidly increased benchmark rates, TD’s profit margins on loans are increasing. The bank’s U.S. net interest margin increased by 46 basis points year over year, and its Canadian margin was up 9 basis points. (100 basis points equal one percentage point).

“Everything else being equal, we would expect our margin to continue to expand,” Mr. Tran said.

Wholesale banking profit fell 18 per cent to $271-million in a challenging quarter for capital markets. But the division’s revenue declined by just 1 per cent.

On Wednesday, TD announced two new appointments to its board of directors: Mary Winston, a former chief financial officer at retailers such as Family Dollar Stores Inc. and Giant Eagle, as well as Cargojet Inc. founder and CEO Ajay Virmani.

Gold range-bound as investors wait for Fed chair’s speech

Gold traded in a narrow range on Wednesday as investors awaited more insight into the outlook for interest rates from U.S. Federal Reserve Chair Jerome Powell when he speaks at central bankers’ symposium at Jackson Hole later this week.

Spot gold fell 0.2% to $1,744.81 per ounce, trading in a $9 range. It advanced 0.7% in the previous session. U.S. gold futures dipped 0.3% to $1,755.90.

https://www.cnbc.com/2022/08/24/gold-markets-jackson-hole-jerome-powell-interest-rate-hikes.html

National Bank reports third-quarter profit down from year ago

National Bank of Canada NA-T -0.74%decrease reported its third-quarter profit fell compared with a year ago as it was hit by higher provisions for credit losses due to a less favourable economic outlook.

The Montreal-based bank says it earned net income of $826-million or $2.35 per diluted share for the quarter ended July 31, down from $839-million or $2.36 per diluted share a year ago.

Revenue totalled $2.4-billion, up from $2.3-billion in the same quarter last year.

Provisions for credit losses amounted to $57-million for the quarter compared with a reversal of provisions for credit losses of $43-million a year earlier.

On an adjusted basis, National Bank says it earned $2.35 per diluted share compared with an adjusted profit of $2.36 per diluted share a year ago.

Analysts on average had expected an adjusted profit of $2.34 per share, according to financial markets data firm Refinitiv.

Brent oil climbs above $100 a barrel amid talk about OPEC output cuts

Benchmark Brent oil climbed above $100 a barrel on Wednesday after Saudi Arabia suggested this week that OPEC could consider cutting output in response to poor liquidity in the crude futures market and fears about a global economic downturn.

Brent for October settlement reached a three-week high, trading up $1.30, or 1.3 per cent, at $101.52 a barrel by 0850 GMT. U.S. crude was up $1.18, or 1.3 per cent, at $94.92 a barrel.

Contracts for both crudes soared on Tuesday after Energy Minister Prince Abdulaziz bin Salman flagged the possibility of cutting production amid poor futures market liquidity and macro-economic fears.

OPEC sources later told Reuters any cuts by the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, were likely to coincide with a return of Iranian the market should Tehran secure a nuclear deal with world powers.

A U.S. official said on Monday that Iran had dropped some of its main demands on resurrecting a deal.

OPEC+ is already producing 2.9 million barrels per day less than its target, sources said, complicating any decision on cuts or how to calculate the baseline for an output reduction.

“The oil price and supply outlook suggest that an OPEC+ cut is not currently warranted,” PVM analyst Stephen Brennock said, outlining possible threats to supply underpinning the market.

“Global oil supply could take a hit as peak U.S. hurricane season approaches,” he said. “Elsewhere, future supply outages in Libya cannot be discounted while Nigeria’s oil fortunes show little sign of improving.”

U.S. crude stockpiles fell by about 5.6 million barrels for the week ended Aug. 19, according to market sources citing American Petroleum Institute figures. Analysts had estimated a drop by 900,000 barrels in a Reuters poll.

U.S. government figures are due out on Wednesday.

Market participants will be watching Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole central bank symposium on Friday. He is expected to stress the Fed’s focus on controlling inflation.

RBC profit misses forecasts, challenging economic outlook prompts loan-loss provisions

Royal Bank of Canada’s third-quarter profit fell 17 per cent as the bank earmarked provisions against possible loan defaults, adopting a more cautious stance against a challenging economic outlook.

RBC RY-T -0.89%decrease earned $3.58-billion, or $2.51 per share, in the three months that ended July 31. That compared with $4.3-billion, or $2.97 per share, in the same quarter last year.

On an adjusted basis, RBC said it earned $2.55 per share, well below analysts’ consensus estimate of $2.66 per share, according to Refinitiv.

RBC kept its quarterly dividend unchanged at $1.28 per share.

The bank set aside $340-million of provisions for credit losses – the funds banks hold to cover loans that may default. Of that, $177-million is against loans that are still being repaid, but which could be at risk in future based on predictions that take weakening economic forecasts into account. That signals that RBC is rebuilding its buffer against possible loan losses after several quarters in which it released large amounts of provisions that it had stockpiled early in the COVID-19 pandemic.

The bank’s results were also hurt by weak results from its capital markets division, where profit of $479-million was down 58 per cent from elevated levels last year. That was partly due to $385-million in loan underwriting markdowns the bank took, primarily in its U.S. division, most of which are unrealized.

Even excluding those markdowns, RBC’s corporate and investment banking revenue fell 49 per cent, as equity and debt origination as well as loan syndication activity slowed dramatically.

The bank’s core personal and commercial banking division also reported a more modest 4-per-cent drop in profit, to $2-billion, though that was driven mostly by rising provisions for credit losses. Revenue was up 11 per cent from a year earlier, with average loan balances increasing 10 per cent and lending margins expanding.

Despite declines in equity and bond markets during the quarter, wealth management profit of $777-million was up 4 per cent.

RBC’s capital levels held steady, with a common equity Tier 1 (CET1) ratio of 13.1 per cent, down 10 basis points from the previous quarter. (100 basis points equal one percentage point). In part, that was because RBC bought back $1.3-billion in shares during the quarter.

Scotiabank earnings miss expectations on higher interest rates

Bank of Nova Scotia BNS-T -5.25%decrease fell short of expectations for its third-quarter earnings as mounting economic uncertainty put pressure on key parts of its business, but executives said consumers and businesses look financially healthy in spite of the headwinds.

Canada’s third-largest bank, the first major lender to report results for the quarter that ended July 31, eked out a 2-per-cent rise in profit. That was bolstered by strong demand for loans in its retail banking units.

However, weak capital-markets activity and surging deposit costs in key Latin American markets dampened some sources of revenue for Scotiabank, and clouded the outlook for lending margins even as interest rates rise rapidly. As a result, the bank’s quarterly profit missed analysts’ estimates and its share price tumbled nearly 5.3 per cent lower on Tuesday on the Toronto Stock Exchange.

Scotiabank’s chief executive officer, Brian Porter, said on a Tuesday conference call with analysts that the bank faces “a less certain economic outlook.” The bank’s executives are watching consumers’ finances and spending habits closely for early signs of stress as high inflation drives up prices for a range of goods, he said.

But so far, customers are still showing “strong financial health,” chief risk officer Phil Thomas said. And the bank does not see signs that its business clients are pulling back significantly on spending or investments.

“The typical indicators of softening demand, or data to suggest business confidence in the real economy is trending lower, is just not present,” Mr. Porter said.

For the three months that ended July 31, Scotiabank earned $2.59-billion or $2.09 a share, compared with $2.54-billion or $1.99 in the same quarter a year earlier.

Adjusted to exclude certain items, Scotiabank said it earned $2.10 a share, below the $2.13 analysts had expected, according to Refinitiv.

Scotiabank took a cautionary step by increasing its provisions for credit losses – the funds banks set aside to cover loans that may default – to $412-million in the quarter. That compared with provisions of $380-million a year earlier and $219-million in the second quarter.

Banks set aside provisions both for loans that are past due and for loans that are still being repaid based on forecasts and models of future delinquencies. Scotiabank’s third-quarter provisions included $23-million earmarked against performing loans, spurred by weakening economic forecasts. In each of the previous four quarters, Scotiabank recovered some performing provisions as the bank released money from large reserves built during the COVID-19 pandemic.

But the $389-million in provisions set aside to cover impaired loans that are past due is still very low by historical standards. Rates of delinquencies and writeoffs are still running at about half what they were before the COVID-19 pandemic, Mr. Thomas said.

“We do not think [provisions for credit losses] will be a major part of the narrative for this quarter,” Darko Mihelic, an analyst at RBC Dominion Securities Inc., said in a note to clients. “Instead, we see revenue weakness across many segments as the challenge.”

Capital markets were a soft spot after generating soaring profits last year, as analysts expected. A sharp slowdown in activity by many clients dragged profit from the global banking and markets division down 26 per cent year over year, to $378-million. Equity issuances were down more than 80 per cent in Canada and the U.S. in the quarter, and debt issuances fell by more than 60 per cent.

“That’s the lowest issuance levels we’ve seen in these markets at any point in the past five years,” Jake Lawrence, group head of global banking and markets, said on Tuesday’s conference call. “In terms of outlook, we have already started to see it rebound.”

Sharp declines in equity and bond markets during the quarter also ate into fee income in the bank’s wealth-management division, where profit declined 3 per cent to $376-million.

By contrast, profit from Canadian banking was up 12 per cent to $1.2-billion. Loan balances increased rapidly, with business loans up 23 per cent and residential mortgages up 14 per cent even as housing markets have cooled.

International banking profits were also up 28 per cent to $625-million, with demand for loans similarly strong. But revenue from the division – which is concentrated in Mexico, Peru, Chile and Colombia – was up only 3 per cent to $2.4-billion. And lending margins in the division contracted by one basis point, as rapid interest-rate increases by central banks in the region pushed deposit rates up faster than the bank could raise interest rates on loans.

Interest rates in Latin America “are peaking,” Mr. Porter said. But the bank’s international experience, where central banks raised rates sooner and faster than in Canada and the U.S., shows how the forceful approach central banks have had to adopt to try and tame high inflation can affect lending margins and demand for new borrowing.

In Canada and internationally, Scotiabank’s customers have moved about $4-billion from core deposit accounts that pay very little interest to higher-paying term deposit products, squeezing profit margins in some areas.

“The demand for credit is strong,” Mr. Porter said. “Asset repricing is happening now and will continue through the balance of fiscal 2023.”

Dow slumps 600 points Monday to wrap worst day since June as summer rally fades

https://www.cnbc.com/2022/08/21/stock-market-futures-open-to-close-news.html

Bank earnings are coming. Here’s what to expect

As investors try to gauge the extent of the economic slowdown, a big clue is set to arrive next week when Canada’s biggest banks start to report their latest quarterly financial results.

Will these linchpins of the economy reveal something important?

Bank of Nova Scotia BNS-T -0.67%decrease will kick off the banks’ fiscal third-quarter earnings season on Aug. 23, followed by Royal Bank of Canada RY-T -0.42%decrease and National Bank of Canada NA-T +0.28%increase on Aug. 24.

Toronto-Dominion Bank TD-T -1.07%decrease and Canadian Imperial Bank of Commerce CM-T -0.95%decrease will report their quarterly results on Aug. 25. Bank of Montreal BMO-T -1.24%decrease will conclude the flurry of results from the Big Six on Aug. 30.

Analysts aren’t expecting anything dramatic. Loan growth will continue at a strong clip, while provisions for credit losses remain low.

However, profit growth will falter from weaker capital markets activity and wealth management. Scott Chan, an analyst at Canaccord Genuity, expects bank profits will rise by just 1 per cent from the third quarter of last year.

But this is far from a ho-hum reporting season that investors can ignore, because it arrives at a time when rising interest rates are dampening economic expectations and raising concerns about the financial health of Canadian borrowers.

“Even though the bank stocks have shown strength more recently, we believe investors will continue to remain conservative, and look for signs of strengths (or cracks) in the banks’ results to better inform the path forward,” Joo Ho Kim, an analyst at Credit Suisse, said in a note.

Bank stocks are already reflecting some concerns.

Though they have rebounded over the past month, stock prices are down 14 per cent since November. Relatively low valuations, in terms of price-to-book and price-to-earnings ratios, also appear to suggest that stocks are priced for trouble ahead, if not an outright economic contraction.

“At this point, we are wondering if too much negativity has been reflected,” Gabriel Dechaine, an analyst at National Bank Financial, said in a note.

He pointed out that forward P/E ratios, which are based on estimated earnings, are 9 per cent below the historical average. And the decline in price-to-book ratios from their recent peak implies a 50-per-cent probability of a recession.

The banks’ financial results may shed some light on whether this dip in valuations is justified.

The Bank of Canada has raised its key interest rate by a total of 2.25 percentage points since March in an attempt to control soaring inflation. Though higher rates make lending more profitable for banks, they can also weaken consumer and business demand for loans.

“Loan growth remains strong for now. However, we expect a deceleration of growth in the coming quarters as demand for credit tempers with higher borrowing costs and a slowing economy,” Paul Holden, an analyst at CIBC World Markets, said in a note.

He expects healthy lending activity in the banks’ third quarter will contribute to full-year loan growth of 12 per cent in 2022. But he thinks annual growth will slow to just 4 per cent in 2023, as higher interest rates work their way through the economy.

Credit health is the other key theme to watch this quarter, as the banks provide insight into the ability of borrowers to meet their debt obligations.

“Although a still positive economy and employment landscape remains constructive for credit, increasing recessionary concerns could weigh on the banks’ forward looking credit scenarios,” John Aiken, an analyst at Barclays, said in a note.

The credit picture had been improving since the banks socked away enormous provisions near the start of the pandemic, in 2020, to handle the severe economic fallout from initial lockdowns. Today, insolvencies are below levels seen before the pandemic and credit card losses remain low.

But analysts expect banks may turn more cautious, especially with large U.S. banks building their financial buffers in anticipation of a slowdown.

Canadian banks had been releasing their financial reserves as the economy healed, boosting profits, but that may stop this quarter. Banks may even add to their provisions for losses, according to RBC Dominion Securities.

As well, Mr. Aiken expects that banks may temper their enthusiasm for share buybacks in an effort to preserve capital and may pause on dividend increases this quarter after recent hikes.

The health of the economy is one of the thorniest issues facing investors right now. The banks should provide some clarity.

Canadian auto parts stocks a cheap play on improving global supply chain

You generally want to steer clear of the auto sector when recessionary forces are approaching. This may be the time to break that rule.

Signs of recovery have permeated the industry over the past month as supply chain constraints and shipping bottlenecks have eased up and the global chip shortage has improved.

Auto production is on the rise globally, corporate earnings trends are generally improving across the sector, and the Canadian parts manufacturers, like Magna International Inc. MG-T -1.03%decrease, are seeing their stocks in the early stages of a comeback.

General Motors Co. GM-N even reinstated its dividend this week after a two-year suspension.

The only hitch is that pesky global recession, which is very much a possibility over the next year, according to economic consensus.

Fear not, say some auto sector analysts. Even if demand for new vehicles falters, there will still be an acute need to restock inventories, which remain at historic lows as a result of the supply chain crisis.

“This uniquely positions the auto suppliers and insulates them from a weakening economy,” CIBC World Markets analyst Krista Friesen said in a recent report.

That’s a novel set-up for a sector as attuned to the cycles of the economy as this one. But in this puzzling economic moment, all kinds of well-worn patterns and relationships are falling away.

Clear signs of slowing growth and tightening financial conditions, for example, are contrasting with a booming jobs market, which is helping sustain a hearty appetite for new and used vehicles.

Household finances in North America are, on average, still being propped by a vast amount of excess savings built up over the COVID-19 pandemic. Consumers emerged from lockdown flush with cash and ready to spend.

The auto sector has been unable to fully capitalize on that booming demand. A crippling shortage of semiconductors used in a range of components and sensors meant that automakers had to slash production and make factories idle.

Buyers have faced long delays in receiving new vehicles as dealership lots have emptied out. All sorts of parts became more expensive and tougher to source. “The chip shortage is a perfect example of how just-in-time inventory and single-source supplying became a problem,” said Jason Mann, chief investment officer at Toronto-based EdgeHill Partners. “One component goes down and the whole chain falls apart.”

But the signs of an improving supply backdrop are now starting to pile up. Shipping costs have topped out and the logjam of ships in U.S. harbours seems to have peaked. Indexes measuring global supply chain pressures have fallen by 50 per cent or more. And the auto industry is tracking toward an increase in production of nearly 20 per cent in the second half of this year over the first half.

Crucially, there are no signs that consumers are starting to cut back on spending on new cars.

“While there are growing concerns around a recession, the impact of rising rates and weakening consumer confidence, demand for new vehicles continues to outpace supply,” Ms. Friesen wrote.

As a result, the market has started to reprice the auto sector. Magna’s shares have gained 17 per cent over the past six weeks. Its smaller Canadian competitors in the parts space, Linamar Corp. LNR-T -0.27%decrease and Martinrea International Inc. MRE-T +0.09%increase, have risen by 23 per cent and 42 per cent, respectively, over the same period.

Meanwhile, Edmonton-based auto dealership group AutoCanada Inc. ACQ-T -0.98%decrease has seen its stock advance by 14 per cent since early July, and collision repair chain Boyd Group Services Inc. BYD-T -0.97%decrease by 31 per cent.

That’s a welcome reversal from the sector’s year-long selloff, in which every name in the group lost at least 40 per cent from its peak. That all-consuming slide now has the Canadian auto suppliers trading below their 10-year averages, Ms. Friesen said. Her top picks in the space are Magna, Linamar and AutoCanada.

The major hit to demand that investors have feared could still materialize, particularly if North American unemployment starts to rise meaningfully.

But even if that happens, these stocks will have the support of low valuations as well as depleted inventories across the entire industry, Ms. Friesen said.

“There will still be a need to replenish inventory levels, which we estimate could take until at least 2024.”