It's a mixed result to see such a discrepancy between TD, RBC and CIBC earnings: Thackray
Canadian banks that reported fourth-quarter earnings this week have all announced dividend increases despite a challenging operating environment, and experts say the road ahead looks good for the banks despite the recent underperformance.
Scotiabank, TD Bank and the Royal Bank of Canada have all posted higher-than-expected provisions for credit losses, while CIBC’s credit loss provisions came in below analysts’ forecasts.
TD Bank reported a drop in profit compared to a year ago and said it is unsure if it will meet its future growth targets for 2024. The bank also announced plans to cut three per cent of its workforce.
Meanwhile, RBC and CIBC beat analyst expectations for the quarter, though RBC also set aside more money for loan losses than expected.
Despite the weakness, all of the banks hiked their dividends. Brooke Thackray, research analyst at Horizons ETF Management Canada, was encouraged by the trend.
"It’s a positive sign that we’ve seen all three banks actually come out and make an announcement to say let's increase their dividends. If they thought they were in serious trouble they would have held back a bit," Thackray told BNN Bloomberg in a television interview on Thursday.
Thackray noted that TD showed the most weakness of all the banks that reported, and said he suspected it might be the type of quarter where all the banks acknowledge their pressure points.
“You have to wonder, is this the kitchen sink earnings? Are they throwing everything in there saying, ‘Look, let’s just get this over with. Get it out there so we can move forward,’” he said.
As for the uptick in credit loss provisions, Thackray believes it may very well be a conservative measure, which is in line with how the Canadian banks conduct business.
“Banks are pretty conservative,” he said.
REASONS TO BUY THE BANKS
The banks conservative approach comes in part by strong regulations in Canada, Paul Harris, partner and portfolio manager at Harris Douglas Asset Management, told BNN Bloomberg on Thursday.
“Canadian banks are in great shape and that’s really important, and it goes to our regulation in this country, they are highly regulated and well regulated,” he said.
The strict policies put in place have helped the banks maintain healthy capitalization levels over the years, even with the recent increase in capital requirements, he added.
Douglas pointed to the banks setting aside money for loans that borrowers are already making payments on as a red flag and the challenge for the group to cut operating expenses.
"It takes a long time for a bank to change its expenses, because so much of it has to do with employees, and banks – in this country specifically -- wouldn’t layoff 10 per cent or 15 per cent of their staff. If they had to do that they would do it very slowly over a period of time,” he stated.
Despite the pressure, he thinks investors who buy the Canadian banks now are getting a deal.
“From a valuation perspective, I don’t think they’re very expensive,” he said.
“They've got great regulation, they’ve great capital, you’re not paying a lot on price to book, you’re not paying a lot on earnings as well, and you’re getting a really great dividend. I would say you want to buy these at these levels.”