Paul Bagnell

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Fiscal 2019 was expected to be a year of tough slogging for the Canadian banks, and the just-concluded second-quarter earnings season bears that out.

Earnings growth remains modest. Domestic profit growth has slowed to a crawl. Mortgage performance is uneven. And costs were elevated at some banks.

But there were also signs of improvement over fiscal 2019’s first-quarter results.

There was no surge in loan-loss provisions. Profit growth from the banks’ U.S. segments was almost uniformly stellar. Profit from the capital markets businesses roared back from a weak first quarter. And the two banks that were expected to raise their dividends did just that.

One investing pro I’ve spoken to recently says the banks continue to defy the alarmist warnings of short-sellers – and their stocks offer Canadian investors solid dividend yields that are difficult to find anywhere else.

Ryan Bushell of Newhaven Asset Management says the retreat in government bond yields over the past six months and the Bank of Canada’s increasingly “on-hold” posture make a serious mortgage-lending contraction at the banks unlikely.

“People expecting a calamity are going to have to continue to wait,” he told me on the day the final Big Six lender – National Bank of Canada – reported its results.

As bank share prices have drifted sideways for the past year and a half, dividends paid by the banks have steadily risen across the group. And dividend yields now range between 3.98 per cent (Royal Bank of Canada) to 5.45 per cent (Canadian Imperial Bank of Commerce). Bushell puts dividend investing at the core of his long-term strategy for clients, and remains invested in the Canadian banks.

Here’s what we saw in the second quarter:

-Modest profit growth. Earnings per share rose only 3.6 per cent in the quarter compared to the same period in 2018. Slower growth in Canadian retail banking and rising provisions for credit losses were the culprits. Elevated spending on things like technology was another factor.

-Uneven mortgage growth. A slowdown in mortgage activity is clearly a big reason for the sluggish domestic profit growth that investors just witnessed. 

CIBC’s mortgage book posted a notable slowdown in the latest quarter.

The numbers were not uniformly weak, however.

Royal Bank delivered impressive five per cent growth in its mortgage balances over the prior year.

-The Quebec factor. The Quebec economy boasts lower unemployment, less household debt, more modest home prices and balanced provincial budgets. 

All of this was expected to be a significant plus for National – the bank with by far the largest proportionate exposure to Quebec – and it was. Profit growth in retail banking at National was an impressive nine per cent.

-The U.S. factor: Toronto-Dominion Bank and Bank of Montreal both posted impressive double-digit profit gains in their U.S. banking businesses. 

TD has a large retail banking presence in the northeastern U.S. and saw its adjusted U.S. profit surge 20 per cent. The U.S. profit of $1.26B accounted for almost 40 per cent of TD’s total earnings in the quarter. 

At BMO, adjusted profit rose 16 per cent in its big U.S. business, centered in Chicago and Milwaukee. 

And at CIBC, the newer and smaller U.S. business delivered an adjusted profit gain of 24 per cent.

-Loan losses: Provisions for credit losses (PCLs) rose on an absolute and ratio basis at most of the banks, but not steeply. 

Bank of Nova Scotia reported the largest rise in PCLs, but it was almost entirely driven by acquisitions. Scotia closed six deals over the year that ended on April 30, including banks in Chile, Peru and the Dominican Republic.

When a bank buys another bank, it inherits the good loans and the bad loans. Scotia will be working to improve the quality of those loan books over the next year.

-Dividend increases: As expected, both BMO and National raised their dividends.