Betting on Canada is Working for These Canadian Banks

[00:00:14] Welcome back to the Canadian Investor Podcast. I'm back here with Dan for our news and earnings

[00:00:20] episode that will be airing this Thursday. Dan, how's it going? How are things on the

[00:00:25] investment front for you? Pretty good. It's crazy, it's already September, Q3 is done.

[00:00:32] Like where is the time going? I know we're gonna have to start thinking about our bold predictions

[00:00:38] for 2025 as crazy as it sounds. I'm just like getting used to saying 2024 so yeah I know

[00:00:44] you know and then we're switching the year over. Yeah, yeah one more quarter left on the year,

[00:00:49] that's crazy. Yeah and before we get started quick question for you, I did not ask you beforehand

[00:00:56] so you're gonna be put on the spot. What's the Bank of Canada going to do tomorrow?

[00:01:01] CUT I think. CUT, yeah I would imagine so. And then yeah the Fed will follow I would imagine.

[00:01:07] The big question is 50 basis points or 25 from the Fed like Bank of Canada should be 25.

[00:01:13] Yeah I think so that's I mean obviously if they do 50 for the Bank of Canada I think they're

[00:01:19] there's something they're seeing that is not good and I think we've talked about that before but

[00:01:23] yeah for the Fed for the September 18 probability so it's about two thirds 63% for

[00:01:31] one 25 basis points cut and then 37% for the 50 basis point cut. So it'll be interesting,

[00:01:40] I mean those odds have kind of changed kind of been all around a little bit so it'll

[00:01:44] be interesting where it goes but by the time you listen to this podcast you'll already know

[00:01:49] what the Bank of Canada did so you'll see if we were completely wrong with our 25 basis points cut

[00:01:55] or not. Yeah and I mean if it's any indication from like what we're seeing from the Canadian banks

[00:02:00] clearly these cuts are spurring a bit of lending because all the banks Canadian segments are

[00:02:06] just ripping really it's pretty crazy especially the ones with high Canadian exposure I mean

[00:02:13] they're definitely that's the best performers on the year for sure and a lot of people wouldn't

[00:02:18] have predicted it at all. As long as you close your eyes and don't look at the delinquency right

[00:02:23] exactly some of their loans because we started and we'll be talking about the banks quite a bit

[00:02:28] today so probably the good banks and I say good in air quotes just because they're the ones that

[00:02:33] reported probably the better results compared to last week where we talked about the ones you

[00:02:39] know so we had BMO, Scotiabank and TD what was TD yeah that did not have great results so this

[00:02:46] week we'll be doing Royal National Bank and CIBC but we'll be starting off with some news from

[00:02:52] Bell Canada. BCE sorry Bell Canada Enterprise I guess I keep forgetting I'm just used to

[00:02:59] Bell Canada so they were downgraded by Moody's so for those not aware Moody's is a rating

[00:03:05] agency they do credit ratings there's also SNP and Finch if I remember correctly I always forget

[00:03:12] about Finch yeah yeah so there's the big three here the rating to give some context here they were

[00:03:18] downgraded to the lowest rating for investment grade so typically for ratings you'll have

[00:03:24] investment grade and non-investment grade and then there's a bunch of different echelons

[00:03:28] that you can have for our joint TCI viewers here you'll see on the screens you'll see the

[00:03:34] rating ladder for Moody's so you have I think just looking at it quickly 10 that are investment

[00:03:41] grades with AAA being the highest and then another 10 from what I can see here or 11 that are non-investment

[00:03:49] grade so non-investment grade would be either subprime or junk level and you know I've been

[00:03:55] very critical here about these rating in the agencies in the past just because they tend to

[00:04:00] be a bit behind the ball yeah quite a bit behind yeah quite a bit I mean obviously they were behind

[00:04:07] the ball for the great financial crisis more recently we saw SVB Silicon Valley Bank in early

[00:04:13] 2023 where they literally downgraded like the debt to junk like the day before they filed for like

[00:04:21] the day before like there was a run on the bank and everything started unfolding for SVP where

[00:04:28] was obvious that was happening so they're they tend to be a bit behind the ball but the one thing

[00:04:34] that's important to note is if you get downgraded it will likely increase the cost of your debt yeah

[00:04:40] so that's important to know because the you know the lower you are on the echelon here the more

[00:04:47] people will be okay lenders will be okay that's fine we'll lend to you but we'll lend at a higher

[00:04:52] interest rate so I think that's the part that people need to understand yeah it's very similar

[00:04:57] situation just from like a personal credit you know people with higher credit often get you

[00:05:02] know more attractive lending rates and I mean the thing they are quite behind because you have to

[00:05:08] think about we've been talking probably about all the things they mentioned in the article for like

[00:05:11] nine months now yeah and they're finally downgrading them now but yeah it's they're a bit behind

[00:05:18] the ball but I mean it's still not really all that good of a situation yeah exactly and at

[00:05:23] least a good news here is they move the outlook from negative to stable so that simply means that

[00:05:29] they do not think an imminent downgrade is likely although that can really change pretty quickly

[00:05:34] depending if there are material changes with the business or its ability to serve as the

[00:05:39] debt so take that with a grain of salt s and p one of the other rating agencies has bc two

[00:05:46] notches above junk level how though bc is still on negative outlook since March so don't

[00:05:52] be surprised if a downgrade also comes from s and p and if you're a bc shareholder I hope

[00:05:59] this doesn't come as a surprise if it does then I'll be very blunt here you don't really understand

[00:06:05] the financials of the business you all that's as simple as it can be because like Dan said I mean

[00:06:10] we've been talking about this for quite some time I mean bc has now 6.5 billion in debt to be

[00:06:15] refinanced between now and June 30 2025 I mean it may be a bit less than that because that was as of

[00:06:22] June 30 2024 so they may have refinanced a little bit since even though it looks like rates are

[00:06:28] coming down like we discussed bc is debt is still likely to be refinanced at a higher cost

[00:06:34] their interest expense a run rate is on track to be 1.7 billion on an annualized basis and

[00:06:42] that's a 48% increase since 2022 and well above 50% since 2021 and the last thing I will mention here is

[00:06:52] when you compare their interest expense through so the EBITDA versus interest expense so EBITDA is

[00:06:59] earnings before interest taxes depreciation and amortization I think it's a fair way to look

[00:07:04] at it because there are some substantial depreciation depreciation and amortization charges for a

[00:07:11] company like bc so you wouldn't want to you know take that away from them because it's a non-cash

[00:07:17] expense I mean it's gone so the higher the better here so just a number of times that

[00:07:22] they're essentially this profitability measure covers the interest expense and it peaked at

[00:07:28] 9.2 times in 2016 and has steadily gone down since and now the last 12 months it's at 5.4

[00:07:39] so you can see that you know that's a pretty dramatic change and that's just the interest expense

[00:07:45] yeah and it's I mean I had some I have some comments on the on the targets that they have like

[00:07:51] internal targets but I mean it's like it's not good it's fallen by what you're getting down

[00:07:56] close to it's fallen by 50% since 2016 and the debt situation has has gotten a lot worse

[00:08:03] and you know just the overall growth perspective isn't really all that good for bc I mean

[00:08:10] the one thing that I do find a bit comical was the company's targets so prior to I believe it was

[00:08:18] at the start of the year so they they wanted a net leverage ratio which would be I can't remember

[00:08:24] what the exact ratio is EBITDA to debt something like that might be EBITDA EBITDA to

[00:08:29] net interest expenses but they wanted it 2 to 2.5x and then they kind of came out with a release that

[00:08:36] said you know okay we we don't think we're going to be able to hit that target so we're going to

[00:08:40] bump it up to 3x and at the point at that time their net leverage ratio was 3.4x and now it's

[00:08:47] jumped up to 3.71 so I mean they they're nowhere close to their old target so they just

[00:08:54] kind of moved the goal post, revised the target up and then they had the one thing I'll just add

[00:08:59] there for those who are not very familiar with that so it's a bit different than what I was talking

[00:09:03] about but it's basically a bit of the inverse he's not looking at the interest expense but

[00:09:08] lower is better here where the one I was comparing to higher is better yeah yeah exactly and on that

[00:09:14] front the the adjusted EBITDA to net interest expenses they used to have an internal target

[00:09:22] of I believe it was 7.5 and that's the one that you want to see higher so you want to see

[00:09:28] that EBITDA cover net interest expenses more so in 2022 it was at 8.3x and now it's fallen to

[00:09:37] it's under 7 and in terms of this you know they had internal targets of 7.5x but they just scrapped

[00:09:44] those targets altogether so they just don't even give a target anymore and they say it's

[00:09:48] to simplify their you know targets I kind of think it's because yeah they just can't hit them

[00:09:56] so they just move them which is like I can see it from like say an earnings or a revenue basis

[00:10:02] like guidance gets shifted all the time but like the debt levels like this like it's just like

[00:10:08] the company's issued five billion dollars in debt alone this year like they're supposed

[00:10:13] to be deleveraging but really they're just adding more debt and then kind of bumping their targets

[00:10:18] upwards which I believe this is like obviously there's a really easy lever the company could pull

[00:10:25] to improve its situation which again they won't do it I don't think they'll do it but they should

[00:10:29] do it and that would be the cut of the dividend but instead you know the target's just being

[00:10:35] revised upwards and scrapping of other you know internal targets that they've kept

[00:10:39] for a very long time just isn't really a good sign in my eyes I mean this what I'm showing here

[00:10:47] is the debt level so essentially yeah it's more than double in the last 10 years the total amount

[00:10:52] of debt that they have and I think this is definitely a byproduct of a company not feeling

[00:10:56] the pinch too much because interest rates were so low exactly for so long and I think they got used

[00:11:01] to that fact and now it's catching up to them instead of trying to manage things a bit more

[00:11:07] conservatively maybe pay down some debt even though maybe at the time it didn't seem that pressing I mean

[00:11:13] now they would have been much in a much better spot if they had done that yeah I mean it's you had a

[00:11:19] lot of years of you know very low interest rates you know cheap debt so you could probably maintain

[00:11:24] those targets and that but you know when the environment changes instead of you know shifting

[00:11:29] the strategy to try to maintain those targets they just kind of bump the targets up which is

[00:11:33] it's a bit odd I mean like I said over the year they've added 13% in terms of their total debt

[00:11:39] whereas you know Rogers and Tellus are in the mid single digits low single digits and Tellus

[00:11:44] actually reported a quarter over quarter reduction in overall debt levels not by very much but

[00:11:50] it's a you know it's a reduction nonetheless and then just in terms of the dividend I mean

[00:11:55] the company is trailing 12 month free cash flows are 2.89 billion and the company was about

[00:12:01] 3.6 billion in just common share dividends over that time frame so I mean they got to you know find

[00:12:08] 760 some million and I mean a lot of investors I've had told me that they kind of have the idea that

[00:12:14] you know the dividend is covered but they're financing the capital expenditures they kind of

[00:12:18] have that mentality like the company's financing the Kpex the dividend is covered but ultimately

[00:12:23] I mean it's just it's kind of money the company doesn't have and I pulled this chart up

[00:12:28] for joint TCI there's a lot of people sometimes think you know that these telecoms go through you

[00:12:34] know Kpex cycles and they go through long periods of you know not being able to afford the dividend

[00:12:39] and it kind of you know evens out over the long run but I mean Bell hasn't been in this situation

[00:12:45] we're going on two plus years of the company not being able to afford the dividend since

[00:12:49] the dot-com bubble so if you look back in 2000 on the chart you can see that you know free

[00:12:55] cash flow per share did not cover the dividend from you know the late 90s up until about 2004

[00:13:00] and then you know from then there's maybe six or seven maybe eight quarters over the next

[00:13:08] what is that 20 years where the company couldn't cover the dividend but other than that

[00:13:12] free cash flow has covered it and now we're sitting you know at the end of the chart they

[00:13:18] haven't had a you know quarter where the free cash flow per share covers the dividend since

[00:13:25] it doesn't say the exact years here but it looks to be 2021 and they haven't had positive coverage

[00:13:30] since so it's definitely not a typical situation yeah and I mean look at the end of the day I'll

[00:13:36] keep bang the drum they should cut the dividend I think it's short-term pain for a long-term

[00:13:41] gain for a company like BC maybe that will be my um bill prediction for 2025 is that

[00:13:46] BC will finally cut the dividend by the end of the year I think it's a 50-50 chance personally

[00:13:53] that they would buy in 2025 I think they will do it if they don't have a choice if financing

[00:14:01] costs become so high because lenders are saying like look we we we have to charge you ensure a

[00:14:07] higher interest rate because your debt levels are so high and I think they won't have a choice

[00:14:12] that's I mean that's going to be my bold prediction so a little preview for

[00:14:16] right the end of the year that's probably going to be one of my bold it is pretty bold

[00:14:20] because uh I don't think they'll do it I mean the other thing I check too in terms of institutional

[00:14:26] ownership like it's declining like over the last year I believe it was at 65 percent

[00:14:31] institutional ownership and now it's down to like the 50 percent range so I mean

[00:14:36] institutions are selling this thing as well I mean it's still very heavily institutionally

[00:14:40] owned I mean this is a blue chip Canadian stock but uh it's not I mean I wouldn't call it a blue

[00:14:47] chip but the perception is yeah the perception is that it's not would not have those kind of

[00:14:53] financials yeah and it probably wouldn't draw down you know as much as it has but yeah it's

[00:14:58] it's it's getting pretty ugly I'm really interested on the the free cash flow guidance they issue

[00:15:05] for 2025 that'll be yeah that'll be very interesting yeah definitely

[00:15:12] we'll move on because we have a lot to cover still so before we get to banks I wanted to

[00:15:17] talk about Lula Lemon that released her recent earnings it was not a great quarter for Lula

[00:15:22] Lemon I'll go over that full disclosure I do own this company so I definitely you know it's

[00:15:28] been pretty painful for me over the last year or so so Lula Lemon is down quite a bit

[00:15:33] net revenues increased 7 percent while comparable store sales were almost flat I mean they were up

[00:15:40] 2 percent China revenue was definitely a bright spot increased 34 percent while comparable sales

[00:15:46] were up 21 percent more worrying those was definitely the Americas which includes Canada and the US

[00:15:52] so they saw comparable sales declined 3 percent comparable sales internationally were up 19 percent

[00:15:59] men's sales was definitely a bright spot here it grew by 11 percent it is a smaller part of the

[00:16:04] business still while women's sales grew 6 percent another bright spot is margins remain strong so

[00:16:11] operating margins increase 80 basis points while sorry gross margin increase 80 basis point while

[00:16:17] operating margin increase 100 test basis points they also reduced their inventory pretty substantially

[00:16:24] during the quarter the net income was up 15 percent to 393 million earnings per share increase 18

[00:16:31] percent that's because they repurchased about 583 million worth of share during the quarter

[00:16:38] free cash will was down 11 percent to just shy of 300 million but again on a quarter to

[00:16:44] quarter basis free cash will can vary a bit so I wouldn't worry too much about that on the

[00:16:50] so what really I think uh disappointed investors although the stock hasn't been down all that much

[00:16:58] yeah so I think it's probably people were expecting this yeah we're expecting kind of

[00:17:04] slowing sales I mean we've talked about it without kind of repeating ourselves you know a lot of

[00:17:09] retailers are saying that people are pulling back and kind of cutting back on spending so I

[00:17:14] think broadly the market was I'm assuming kind of factoring that in in the stock price I mean it's

[00:17:20] not performing well at all for probably now like yeah better part of a year they reduced their

[00:17:26] guidance by 3% using the midpoint for 2024 as a whole compared to what they had been guiding

[00:17:33] up to the last quarter basically before q3 the reason for the reduction was macroeconomic

[00:17:39] uncertainty as well as issues with their product assortment specifically with their women's lines

[00:17:45] so that was one of the big issues on the call they said that their international business

[00:17:50] remains strong which is clear with the numbers the us is definitely where the problem is it's

[00:17:56] their largest market and sales were flat us men's sales continue to grow but their

[00:18:01] women's business actually slowed a slowdown they said that they've identified the main

[00:18:05] factor which was the new products they offered were essentially there was less newness to their

[00:18:12] product assortment that's the word they use newness and it was especially true for women's

[00:18:17] bottom the new items they had performed well but simply didn't have enough selection and

[00:18:23] they said the product decisions had been taken earlier this year now I don't know if you

[00:18:28] remember but we talked about it is their chief product officer resigned abruptly a couple weeks

[00:18:34] before the previous earnings you remember that yeah and we found it like a bit odd but on the call

[00:18:41] they've made it sound like it was kind of planned or nothing like you know it wasn't because any

[00:18:47] issues although on the cal they had kind of looted the previous earnings called that

[00:18:51] there were some things that were not kind of meeting their expectation in terms of the

[00:18:57] product assortment but now what they mentioned on this call I mean it's hard to not think that

[00:19:04] him that the resignation did not have anything to do I mean they must have seen what was happening

[00:19:11] they must have seen trends with the data where things were not selling as well and essentially

[00:19:16] they said that historically they just had more new items available especially for the women's

[00:19:22] products and they want to get back to that and they believe they'll be able to do so

[00:19:26] by no later than early 2025 so spring of 2025 they believe they'll be able to

[00:19:33] have these new products and that should help sales kind of you know pick back up but they did

[00:19:39] mention that obviously the macroeconomic environment is also having an impact on their sales

[00:19:45] yeah I mean these are really difficult businesses to operate especially like you know fashion

[00:19:50] just period we've seen it with irizia last year like there's been a huge deviance in

[00:19:56] lulu lemon and irizia over the last year like irizia is up close to 80 percent I think and lulu

[00:20:01] lemons down what probably 35 for something yeah like yes like that probably not quite have but

[00:20:07] down quite a bit yeah and the thing with irizia back then is you know that they had a lot of

[00:20:12] high levels of inventory and there it was kind of the same talk you know like not enough new

[00:20:17] products I mean and then you know when older products don't sell well or you create new products

[00:20:21] that don't sell well you get a ton of inventory that obviously you've paid to make and then you

[00:20:28] got to mark it down which ultimately hits your margins pretty hard and yeah these businesses are not

[00:20:33] easy to operate whatsoever especially you know a more expensive retailer like lulu lemon

[00:20:40] like you know you have the the macro environment and then you have you know just the

[00:20:45] difficulties of having to constantly be making new products that people are you know buying over

[00:20:51] and over again it's uh yeah they're they're tough businesses to operate I mean I I don't think lulu

[00:20:56] lemon's going anywhere anytime soon I would imagine when when the environment improves I think they'll

[00:21:02] be just fine but it just it kind of highlights like I've always kind of said for quite a while

[00:21:07] like you want you don't want to go crazy on you know retail stocks because they can have

[00:21:12] massive drawdowns Eritzia, Lulu lemon, Nike, Canada Goose it's they're very hard businesses yeah

[00:21:20] yeah it's very rough it hasn't I think all of those maybe except Eritzia but Eritzia had like

[00:21:26] a pretty bad year I guess before the recent run-up in the past year so and then I'm sharing here

[00:21:32] the chart for lululemon so the price earnings ratio which is it's never this low like the

[00:21:38] 4d for lululemon is under 20 like that's a rarity I mean in the past if you were able to buy lululemon

[00:21:45] in the 20s high 20s it tended to be a pretty good entry spot as a valuation and now it's trading

[00:21:52] at around 18 19 so um clearly there are some uncertainties ahead obviously you want them to

[00:21:58] ride this ship they did say that their brand still resonates with women especially in the U.S.

[00:22:04] so they still have a lot of brand power but the fact that they were lacking products they noticed

[00:22:08] that people were still searching for their products but they weren't closing the sales that's what they

[00:22:12] actually said on the call so take that as you wish but I mean for those that were interested

[00:22:18] in this name it may be worth a look because whether you're looking at it on a price to

[00:22:22] earnings or price to free cash flow or whichever other valuation metric it does look

[00:22:27] pretty cheap right now as long as you believe that growth will kind of pick up going forward

[00:22:32] I mean the international market is doing quite well so if they can just pick up and have decent

[00:22:38] growth in the U.S. should be fine Canada was still doing quite well I think it was in the

[00:22:44] high mid single digits so something to keep in mind but the valuation is definitely on

[00:22:50] on the low end here yeah I would imagine where your more established market is I mean you're

[00:22:55] like when times get like this you know it's a more well-known brand it's probably going to

[00:23:00] realize a larger slowdown whereas in you know the international markets where it's kind of still

[00:23:04] a new thing it can probably continue to grow through all of this but I don't know as I've said

[00:23:09] I don't think Lulu is going anywhere anytime soon no exactly but now I think enough about

[00:23:15] the teaser before the bank so do you want us you want to get started with the biggest of

[00:23:21] the mall so I have Royal Bank yeah so Royal Bank has put up some very solid quarters over the

[00:23:28] last you know two quarters six months or so it's been one of the better performing Canadian banks

[00:23:32] and it's kind of starting to show its brand strength here in Canada revenue of 14.6 billion

[00:23:38] that topped expectations by around 400 million and earnings per share of $3.26 came in 30 cents

[00:23:46] ahead of estimates and we're seeing much the same amount of Royal as we all as we are all the

[00:23:52] other Canadian banks and that's just kind of like that their Canadian arms are performing

[00:23:56] exceptionally well and although Royal is the most diversified from like a geographical basis like

[00:24:02] it's got exposure to 40 plus countries it does have some of the heaviest exposure to the Canadian

[00:24:08] economy out all the banks which is it's just crazy how it's a tailwind right now because

[00:24:12] you wouldn't really think that like you would have thought it would have been softer here

[00:24:16] but it's just it's going crazy they've grown book value by 11 percent year over year

[00:24:22] return on equity came in at 16.4 percent at CET 1 is at 13 percent which is well ahead of the

[00:24:29] regulatory minimum and they reported deposit growth of 22 percent year over year and loan

[00:24:34] growth of 17 percent year over year however a lot of this growth is coming through the HSBC

[00:24:41] HSBC acquisition so if we isolate that out it's grown loans and deposits by you know

[00:24:46] mid single digits and low double digits respectively but a lot of the banks like I

[00:24:50] believe Scotia reported a decline in loan volume and like a very small amount of deposit volume I

[00:24:58] think it was like two or three percent so I mean there's definitely separating numbers between Royal

[00:25:03] Bank and you know a lot of the Canadian banks that are struggling as late 12 percent increase in

[00:25:09] mortgages five percent in helox 13 percent in credit cards again though if we if we isolate

[00:25:14] out HSBC it's all around the mid single digits but the one thing that's really standing out for

[00:25:20] the company right now is its overall volumes in the business segment so there's 14 percent year

[00:25:25] over year growth which is the fastest out of any segment by a large margin and this is also X

[00:25:30] HSBC so when you factor in HSBC it sits at 41 percent so I mean this makes up a smaller portion

[00:25:38] of revenue than personal lending but it's still a pretty big tailwind and the one thing is and

[00:25:44] probably why they beat earnings expectations so much as their provisions for credit losses

[00:25:49] so they came in at 607 million so on a quarter over quarter basis this is a 145 million dollar

[00:25:55] reduction in provisions which is which is certainly a strong a strong sign and they came in below

[00:26:02] expectations but I mean there is a reduction in provisions it's certainly a positive but the

[00:26:08] Canadian consumer isn't really out of the woods yet the overall reduction in provisions

[00:26:13] primarily came from a decrease in wealth management and capital markets so capital markets or sorry

[00:26:20] wealth management reported a 30% decline and capital markets a 56% decline quarter over

[00:26:26] quarter in provisions whereas its Canadian banking segment increased from 504 million to 536

[00:26:34] but I mean 6% boost in Canadian PCLs I would still view that as a positive we have to

[00:26:40] remember just even like a year ago many of these banks were reporting you know 20 to 30%

[00:26:44] quarter over quarter growth in their Canadian segments and in terms of you know payout ratios

[00:26:50] which are you know there's certainly something people keep an eye on and with banks Royal remains

[00:26:54] pretty steady 45% of earnings whereas you know you look at companies like TD and Scotiabank they're

[00:27:01] you know especially because of the anti-money laundering with TD they're payout ratios

[00:27:06] like 80 plus percent I think Scotiabank is in the 70% range and I mean in terms of banks

[00:27:12] you never really want to see payout ratios this high like these banks typically as soon as you

[00:27:18] start creeping above 60% it's usually not all that good of a sign I mean TDs is probably short

[00:27:24] live just because once they get over that anti-money laundering it will normalize but

[00:27:28] Scotiabank has been up there for quite a while and they haven't really been able to

[00:27:31] raise their dividend as a result I actually think they're they lost their

[00:27:35] aristocrat status so they're no longer a dividend aristocrat but yeah I mean they

[00:27:40] royals up 26-27% on the year it's outperforming all the major indexes and this is the largest

[00:27:46] company in the country so it's been a pretty impressive first three quarters.

[00:27:51] Yeah and I was for those watching enjoying TCI I was showing the loan loss provisions

[00:27:57] by quarter so it's definitely yeah it's improved it's so is the HBC acquisition or HSBC it's

[00:28:07] closed right it's fine oh yeah yeah yeah okay yeah so now it's like I couldn't remember it's kind of

[00:28:12] the period now where you see a lot of adjusted results so like the results look huge I mean

[00:28:17] 44% business loan growth but I mean it's really not that high it's a lot of it is acquisition based

[00:28:22] but yeah it's closed okay no that was good in terms of loans increasing I don't know if you saw that

[00:28:30] and I'll be talking about it would braid in on Mondays so Equifax came out with the kind of

[00:28:36] consumer credit in Canada and I guess you know makes a bit of sense why the banks are doing

[00:28:42] well because consumer debt level rose to 2.5 trillion in the second quarter and that's a

[00:28:48] 4.2% increase year over year so those loans have to be coming from somewhere and the somewhere is

[00:28:55] probably predominantly the the big six banks so I'm not surprised that the Canadian side of things

[00:29:01] is doing well whether that's good or not I think it's a bit of alarming personally because Canadian

[00:29:07] house will already have extremely high debt levels so the fact that it's going up 4.2% and the

[00:29:13] credits credit cards balances I think they're at the highest level since 2007 so yeah as the banks

[00:29:20] are seeing you know good revenue but I mean it may be a bit short-lived as we may be seeing a bit

[00:29:26] more kind of delinquent loans especially for credit cards I would not be surprised if we

[00:29:32] kind of see yes maybe a royal is doing pretty decent in this quarter but you know don't be

[00:29:38] surprised if you quarter down the line the PCLs go back up way back up again right so things

[00:29:43] can change quickly so I think that's you know just food for thought for those who want to be

[00:29:47] investing in banks yeah it's extremely hard to predict and obviously you know an increase in

[00:29:53] loan volume doesn't necessarily signal any sort of economic health it might just be you know

[00:29:58] people are needing to finance more because cost of living is skyrocketed but I mean

[00:30:04] overall their Canadian segment is doing like I would have figured you know people are

[00:30:08] going to be scaling back borrowing is going to slow but I wonder if there's an element that you

[00:30:13] know rates have come down 50 basis points they're gonna probably come down another 25 so maybe people

[00:30:18] who you know were looking to buy a home that we're holding out might be doing it now they might

[00:30:23] be you know tapping into that HELOC now that they're saving 50 basis points like who knows

[00:30:27] really but I think yeah I think the fact that the Bank of Canada cut before the Fed

[00:30:34] I think that is one of the main reasons why you're seeing Royal CIBC and National perform

[00:30:40] better than say BMOTD or Scotiabank because they have more Canadian exposure and you know

[00:30:46] rates ultimately rates were cut first year so that'll be interesting to see if that continues to

[00:30:51] play out no that's exactly well that was a good overview one thing I'll finish I also did a

[00:30:58] little bit of calculation this morning so I'll talk about that towards the end of my segment

[00:31:04] about CIBC which I'm about to start now so they also release obviously if you were listening at

[00:31:09] the beginning the three banks we're talking about are probably the ones that posted the best

[00:31:13] results revenues were up 13% you over a year and 7% quarter over quarter to 6.6 billion

[00:31:20] I love CIBC they post both you over a year and quarter over quarter so it makes things

[00:31:25] a whole lot easier when you're trying to do an overview so it'd be nice if all the companies but

[00:31:32] especially the banks did that net income was up 25% you over a year and 3% quarter over quarter to 1.8

[00:31:39] billion now for Canadian banking as a whole net income was up 3% quarter over quarter net income

[00:31:45] was up 101% on an adjusted basis so it was in large part due to much lower provisions for

[00:31:52] credit losses capital markets was down 6% on an adjusted basis on an adjusted basis again and

[00:32:00] it come was up 28% and 10% respectively I did not have my full notes I believe this was most likely

[00:32:08] for the US business but I'm not 100% sure here DCT 1 ratio which is a measure of how well a bank

[00:32:17] can absorb losses was at 13.3% and that was up 20 basis point compared to the previous quarter and

[00:32:24] more than 110 basis point you over a year so they've made a lot of progress there I was kind of

[00:32:30] surprised to see how well they did the net interest margin something I always like to look at for

[00:32:35] bank was 1.39% it's improved seven basis point in the past year so it's steadily improved

[00:32:41] that is definitely something you want to see for banks you wonder spread between you know what they

[00:32:47] loan out and what they collect in terms of loans so you want to make sure that you know it's as high

[00:32:53] as possible because that's their bread and butter obviously they also make money through fees but

[00:32:58] the interest margin is quite important they set aside 483 million for credit losses which was

[00:33:04] the lowest amount since Q2 of 2023 so again another reason I think why the market like

[00:33:10] these results the allowance for loan losses so basically the money now the cumulative amount

[00:33:16] that they have on their balance sheet for bad loans is right around 4 billion and it's been around

[00:33:21] that number for about a year now their allowance for loan losses again as a essentially when you

[00:33:28] compare that on their balance sheet versus their gross loan books so their loans is currently at 0.71%

[00:33:36] and has been right around there for about a year so people might be wondering okay so how do the

[00:33:42] other banks compare to that because you know 0.71% you know it's kind of just a number like that so

[00:33:48] let's put it into perspective here so you have national bank that has the lowest here

[00:33:54] national bank has a 0.54 percentage for under balance sheets for provisions for loan losses

[00:34:03] compared to the gross loan books royal is at 0.59% you have BMO at 0.63 CIBC at 0.71 TD at 0.83 and

[00:34:14] Scotia at 0.86 so you see that it's a bit across the board here I did post that on Twitter and

[00:34:22] joint TCI viewers will be able to see it as well so I did a little graphic but it just puts in

[00:34:28] perspective there's quite a wide range so you have like kind of three banks grouped together

[00:34:33] on the low end so you have BMO Royal and National and then BMO I would say I think it's also you

[00:34:40] know they tend to be a bit more business focused right so that could make a bit of sense there

[00:34:45] but then you have CIBC TD and Scotia which are a bit more on the higher end I would say

[00:34:52] CIBC probably in the middle of the range here but TD and Scotia really on the high end

[00:34:56] here so it was just interesting to to compare all of those so any thoughts on that before

[00:35:02] I continue here well the one thing I'll say is like a lot of people might be confused as to why

[00:35:07] like BMO has done so bad over the last while despite you know having more of the lower ratios but

[00:35:11] the acceleration of how fast it's gone up so this 0.63 I believe it's nearly doubled over

[00:35:19] the last year whereas you know CIBC is has stabilized a bit so I mean BMO is kind of you

[00:35:25] in 2023 was reporting a ton of provisions which ultimately you know they did not do very well

[00:35:32] there was a lot of you know negativity around the bank they've really struggled whereas now

[00:35:36] they're kind of stabilizing reduction quarter over quarter provisions whereas a company like BMO

[00:35:42] is accelerating you know like kind of continuing to grow and grow and grow

[00:35:47] and this PCL ratio has like effectively doubled on a year-over-year basis whereas CIBC has stayed

[00:35:54] kind of steady so that might be why you know even though their numbers are higher they're

[00:35:59] performing a lot better over the last while I mean year to date they're up I think they're

[00:36:03] the best bank or no not quite they're up 23% on the year so I mean they're doing very well

[00:36:09] just because you know stabilization in terms of the provisions is a huge thing

[00:36:13] yeah yeah and I think and I know you'll talk about national bank but I think one of the

[00:36:18] reasons are probably the lowest is because they they don't have as much exposure to Ontario and

[00:36:23] BC right they have like very little exposure especially in terms of mortgages right National

[00:36:28] yeah yeah so like if you look at the mortgage book of pretty much every single one of these banks

[00:36:33] outside of outside of national you're gonna see huge Ontario at BC whereas national is

[00:36:39] Quebec is their biggest so I think like Quebec is like 52% this is right off the top of my head I

[00:36:46] can't remember but it's it's over 50% and then Ontario is like mid to high 20s whereas you know

[00:36:52] most of these banks will be a huge chunk towards Ontario and BC yeah but yeah exactly that's probably

[00:36:59] gonna change just because national bought uh Canadian Western yeah so that's gonna change

[00:37:05] you think there's a risk for a royal for example and even a BMO because they still have

[00:37:12] you know in terms of percentage of gross loans and they still have a decent exposure to those

[00:37:17] provinces where consumers are the most stretch I mean I think it's a real risk that you know they

[00:37:23] could be having some pretty big PCLs and you know the next year in some like you know given

[00:37:31] quarters they may kind of surprise a market just because the divergence is so big now between

[00:37:36] you know those at the bottom versus the ones that had a whole lot right like I

[00:37:40] I don't know I feel like there might be I know there's different quality of banks and different

[00:37:45] quality of loans but at some point I mean you can have to wonder like maybe does

[00:37:51] RBC have to kind of increase that like a 10 basis points if that's the case then you'll

[00:37:56] you'll probably see one or two quarters that will be some massive PCLs yeah it's just really hard to

[00:38:01] predict like right now like you said like we have scotia td and cibc in the top three in terms of

[00:38:07] you know PCL ratios I would expect BMO to take cibc over I just don't see like BMO is accelerated

[00:38:14] so much I don't exactly see like a all of a sudden slowdown and BMO does have a lot of exposure

[00:38:19] to commercial real estate in the US primarily which makes up like a big chunk of their

[00:38:25] gross and paired loans but yeah I mean you're seeing you know you're probably gonna see

[00:38:30] in the end these banks with high Canadian exposure having the lowest ratios now whether

[00:38:35] you know that comes to fruition in the next year when all these mortgages are coming

[00:38:39] doing stuff like maybe they start to boost it's so hard to predict yeah exactly it also

[00:38:44] depends on how fast rates come down like that's a big thing too yeah exactly and bond yields bond

[00:38:50] yields will have a big impact there I just think you know before people celebrate you know royal

[00:38:56] you know scotia banks cibc I mean just just realize that yes things may be looking good at

[00:39:03] this quarter but you know it could change quickly right depending on the economic landscape like at

[00:39:08] the end of the day like the economy you know they're as dependent on the economy than pretty much any

[00:39:14] other type of business if not more yeah like number one really I mean yeah exactly so I can't think of

[00:39:21] anything else no that's it so the what I'll finish with here is the net write-off so I was kind of

[00:39:27] stiffening like going through their their earnings presentation as well I went through the the

[00:39:33] supplemental information a little bit and then the earnings and one thing that stood out was

[00:39:37] the net write-off for credit cards increase from 2.69 percent to 3.43 percent in the span of a year and

[00:39:45] is up 18 basis points quarter over quarter that's a pretty significant increase I don't know if it's

[00:39:51] extremely high on historical levels but that is definitely something you should be looking at

[00:39:56] if you own cibc or own any of the banks that's something I just wanted to highlight here

[00:40:02] there's been a pretty sharp increase and the reporting net write-offs have increased

[00:40:08] essentially 0.25 percent that was last year for all of their loans to 0.36 percent so that's a

[00:40:17] pretty big increase that's like a 50 percent increase I know it's 11 basis points pretty much

[00:40:22] it's from low a low base so obviously doesn't look too bad but it's something I think you

[00:40:28] should keep in mind and cibc you know they're just one of the banks with the most exposure to

[00:40:35] Canadian mortgages so keep that in mind I had a look they they do a great job in their investor

[00:40:41] presentation so I do encourage people to look at that they always have their total loan

[00:40:47] book and then they break it down and it's always around 50 to 55 percent if you combine

[00:40:53] mortgages and HELOC that is their loan book so they are very dependent on Canadian housing clearly

[00:41:00] there is some a big chunk of that that's insured but there's also a big chunk of that that's

[00:41:05] uninsured as well so it's something to keep in mind cibc has some of the most exposure in terms

[00:41:12] of I think it has the most to Canadian real estate yeah like residential real estate yeah

[00:41:17] yeah exactly so keep that in mind if we see a downturn in Canadian housing you know cibc will

[00:41:24] definitely be impacted by that I think there's no doubt but that's about it anything else you want

[00:41:29] to add before we finish off with national bank nope that's it so yeah I guess so in my opinion

[00:41:36] national was the strongest quarter out of all the major banks I think again this is just due

[00:41:41] to the fact that it you know it has a lot of exposure to the to the Canadian economy as

[00:41:46] we mentioned particularly you know Quebec eastern eastern Canada for the most part not so much

[00:41:51] western but again with Canadian western they're probably that's going to change moving forward

[00:41:57] I mean revenue came in at 9 2.9 billion which topped expectations and earnings per share $2.68 came

[00:42:03] in well ahead of what was estimated and year over year they've grown revenue by 17% and earnings

[00:42:09] by 23% so this is the highest levels out of any major Canadian bank much like royal business and

[00:42:17] commercial lending is seeing the higher levels of growth so they're up 14% year over year compared to

[00:42:21] just 4% for personal lending and overall deposits were up 6% and the company's capital

[00:42:29] market segment saw some pretty extensive growth as well so revenue was up 55% year over year

[00:42:34] and the company's efficiency ratio which the company's efficiency ratio in the capital market

[00:42:41] segment which efficiency ratio in a nutshell just compares a bank's expenses on a non-interest

[00:42:46] basis to its overall revenue it declined by nearly 8% to sit at 41% so the lower the efficiency

[00:42:53] ratio the better the bank CET 1 came in at 13.5% and its return on equity came in at 18.4%

[00:43:00] I mean just like crazy good numbers from national on the provision side of things PCLs came in at

[00:43:08] 149 million which is a 4% increase on a quarter over quarter basis so I mean again stabilization

[00:43:16] in terms of PCLs they're not reporting those large increases we saw a year ago and as you

[00:43:21] had mentioned the company has the lowest gross and paired loan ratio out of any major bank here

[00:43:26] then again obviously the largest news I believe this was like mid-June maybe late late June they

[00:43:32] they are spending five billion dollars to acquire Canadian Western I think we talked about this

[00:43:37] a few podcasts back just as an individual segment but that was probably the biggest news like in

[00:43:43] terms inside the quarter I mean the stock fell 117 dollars down to 106 on the news but I mean

[00:43:49] it's the market seems to have forgotten about this it's gone from 106 to 124 in the last

[00:43:54] few months and I mean it should allow them to get more exposure outside of Quebec in Ontario which has

[00:44:00] been one of the main downfalls of this bank I guess if you can find a downfall they've done so well

[00:44:06] over the last while it should allow them to not only get exposure to Western Canada but you

[00:44:10] know Canadian Western is you know a smaller bank probably not as large of a product base

[00:44:15] you expose you know Canadian Western customers to you know a bigger suite in terms of

[00:44:19] national could allow them to drive more revenue that way and just overall for the big six banks for

[00:44:26] TCI subscribers I added the just a chart of overall earnings revisions from the banks

[00:44:32] so I've got their 2023 earnings per share their 2024 projected earnings at the start of the year

[00:44:38] and their 2024 projected earnings now so you've got three banks who have essentially received

[00:44:45] downgrades on a year over your basis that would be TD Bank BMO and Scotia BMO is the big the big

[00:44:51] downgrade so initially they had expected earnings per share in the $11.34 range they've now been

[00:44:57] downgraded to around $10.27 whereas national you know they were initially projected to be around

[00:45:03] $9.70 a share and they've been revised upwards to about $10.35 and considering this bank earned

[00:45:10] $9.19 in 2023 that's some pretty big earnings growth from a from a big six bank even though they're

[00:45:17] you know the smallest of the big six banks they've been able to grow at a pretty crazy pace over the

[00:45:23] last while and I mean I think the Canadian Western even though a lot of people thought they

[00:45:27] overpaid for it myself included I do think that's going to be you know an added tailwind for them

[00:45:32] to just expand on you know the western side of the country and yeah they just continue to post

[00:45:37] crazy good quarters for a for a long time now yeah I mean it's it's really interesting chart because

[00:45:44] yeah it's basically last week with the divorce and then we do the best yeah so that's essentially

[00:45:50] what it is but at the same time I think it's just that's why we're talking earlier is

[00:45:54] you know what takes a big hit in terms of those profits is those provisions for credit losses

[00:45:59] so or provision for AML so anti-money laundering for a TD so you have to

[00:46:04] I just want to mention that again because sometimes people will fall in love with these

[00:46:09] kind of numbers because oh they're revised up it's going well you know what if next year a royal

[00:46:14] it's looking at 13-14 dollars right EPS for 2025 I mean I think you have especially when you have

[00:46:22] so much uncertainty in the economy right now be careful doing a victory lap yeah or being too

[00:46:28] bullish about one single own like holding if you have the bang because things can change very

[00:46:34] quickly I mean wasn't it uh I think skosha right skosha I would say they're they were revised down

[00:46:40] but we can be like let's be honest they're pretty much flat right yeah so of the whole three I would

[00:46:47] say yes you have TD bang that's I would say you know it's not far from flat then the worst is

[00:46:54] probably BMO but skosha I mean it's not very far from where I was expected to be

[00:47:00] but the end of last year I mean skosha was I think they started the big loan loss provisions right I

[00:47:06] think it was one of the first episodes we did together and they just had a massive I think it

[00:47:11] exceeded it was like 1.1 billion or something like that for a quarter they went through a period

[00:47:15] where they were reporting like way over estimates and I mean that's going to spook a lot of people

[00:47:21] and right now it's definitely spooking BMO because they're just like yeah they're just

[00:47:27] blowing through like again we talked about it it was 745 million and they ended up reporting

[00:47:32] like 900 some so I mean obviously that's definitely going to impact forward estimates in terms of

[00:47:38] earnings because you know it's it's you never really know when it's going to end when you're

[00:47:44] going to see that stabilization which is why like you would have looked at 2023 you would

[00:47:48] have looked at CIBC and been like man I you I don't want to touch this thing and then all

[00:47:53] of a sudden you can tell they kind of overshot it and that's bank ever yeah and now they're like

[00:47:58] they're killing it right so it's so hard to predict in 2023 it looked like a complete disaster and then

[00:48:03] it looks now like they kind of you know we're overly cautious and now they're scaling it back

[00:48:08] in a big way and and now they're up you know they're having a pretty good year it's very

[00:48:13] hard to predict which is why if you're going to own these just own them for the long term

[00:48:16] I mean it'll drive you crazy especially during times like this trying to you know navigate

[00:48:21] around this stuff yeah well said and I mean even for analysts right like they're not inside the bank

[00:48:27] they're not inside the risk management group for those businesses like if something happens in

[00:48:32] the quarter and the risk management group just said look you know one part of our loans is really

[00:48:39] taking a turn for the worse and I think probably another part for BMO that's probably hit them

[00:48:46] pretty badly and that credit report from Equifax is that auto loans yeah are performing as bad as they

[00:48:53] historically have like it's they're they're doing as badly as they've ever had pretty much for the

[00:48:59] non-bank lenders they're at historical highs in terms of delinquencies and for the banks I think

[00:49:04] just going off of memory but I think the last time they were performing with this bat was in like

[00:49:09] the mid-2010s so keep that in mind because BMO I know had a pretty decent portfolio for auto loans

[00:49:17] so it just goes to show that there's you know there could be one part of their business that

[00:49:22] you know sours pretty quickly within a quarter and the analysts have no idea right like they may

[00:49:27] see headlines they may look into the macro data but they may also talk to some people

[00:49:32] within the banks by the end of the day you won't know until they come out with their earnings

[00:49:36] yeah exactly and I mean in terms of BMO I think they're actually like just out right getting rid

[00:49:41] of their auto loans yeah they are yeah they had announced it yeah go easy so I don't think

[00:49:48] yeah well I think they must still have some on the books right they're just not originating yeah

[00:49:54] exactly some new ones but I just wanted to use that as an example that you know you can have

[00:50:00] a specific part of your business that really you know the rest could be performing well but

[00:50:04] there's a specific part that really kind of is struggling and then they have to compensate for

[00:50:09] that part and then ends up impacting the results as a whole yeah yeah I mean these these estimates

[00:50:16] are prone to change pretty much on a quarter over quarter basis I mean anything can happen like a

[00:50:21] bank can any of these banks can report a quarter where you know the provisions come in

[00:50:26] much higher because they've made some adjustments and I think it's yeah like you said the next

[00:50:31] year is going to be very important because there's a ton of renewals coming up there's more pressure

[00:50:35] on Canadian consumers even though rates are coming down they're still way higher than we've

[00:50:39] normally seen yeah myself included let's go I you know Tiff I know or those rates lower those

[00:50:46] rates pretty aggressively for like early mid 2025 spring 2025 lower them and then hopefully

[00:50:54] I'll have a tough decision between variable and then fix with and with the hopes that the

[00:50:59] bond markets cooperate as well yeah I'm January 2025 and okay so I'm me yeah 2025 so I have a

[00:51:07] I have a little more time so I just gotta you know get them down do it just do it yeah just

[00:51:14] on some fishery sense but no I think this was a good episode anything else you wanted to

[00:51:19] chat about before we let people go nope that's it no not even like we didn't chat about Nvidia

[00:51:25] Braden and I kind of talked about it a little bit any like any just quick impressions on Nvidia why

[00:51:32] you think like the stock might be down this by beating expectations yeah I thought the results

[00:51:36] were pretty good like I don't I don't understand why like they they topped expectations they their

[00:51:42] guidance came in quite well I mean I guess this would be a situation of just you know price

[00:51:46] to perfection add in the fact that September is typically a terrible time for the markets I think

[00:51:53] I think it's been five consecutive years that September's posted a loss like the the markets

[00:51:59] have lost in September 2022 was very ugly I think it was like nine and a half percent people take

[00:52:04] this summer off put an auto pilot and then sell sell sell in September yeah so I'll probably defer

[00:52:11] my deposits till the end of the month and then maybe I think they say like you know it's

[00:52:16] October so he's got a power through you got a power through September but no I was we talked about a

[00:52:23] little bit and that's the same thing we said right at when you have these such high expectations

[00:52:28] and you know a lot of people are in the stock as well that you almost yeah like everything has to

[00:52:34] be perfect I mean I think they were pretty close to perfection but there was a couple things

[00:52:39] that I think just traders were nitpicking at and it's probably pushing the stock down I mean

[00:52:45] today everything seems to be down so you know when everything's down you know chances are that

[00:52:51] Nvidia is down as well yeah yeah when the company is trading at like what are they trading at

[00:52:57] 29 times trailing sales I mean you're gonna have to put up some crazy good results to

[00:53:01] yeah pretty good number to keep that to keep that valuation but yeah I mean I didn't think

[00:53:07] they had all that bad of a quarter it looked pretty good but just yeah I agree negative

[00:53:11] pricing I mean yeah it is what it is okay it's what maybe probably 110 days until

[00:53:18] something like that until they report yeah exactly maybe no another like no that would be too much

[00:53:24] I don't know why I was thinking that's probably like 80 80 90 days yeah 87 yeah 88 days okay okay

[00:53:31] sounds good so we'll be waiting and see what happens there but yeah thank you everyone for

[00:53:36] listening we do appreciate you taking the time to listen and we'll be seeing you next week and if

[00:53:43] you want to see us on Twitter I am at fiat underscore iceberg and then it adds stock trades underscore

[00:53:50] CA yep thanks for listening everybody the Canadian investor podcast should not be construed as

[00:53:56] investment or financial advice the hosts and guests featured may own securities or assets

[00:54:02] discussed on this podcast always do your own due diligence or consult with a financial professional

[00:54:08] before making any financial or investment decisions