Canadian Banks Face Growing Uncertainty as the Trade War Begins

[00:00:01] This is The Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger Welcome back to The Canadian Investor Podcast. I'm back with Dan Kent. We are here for a news and earnings episode and there's a lot of news and a lot of earnings to talk about.

[00:00:24] Obviously the big T word, so tariffs are in fact going into effect effective today. So we're recording this on March 4th, even though you'll be hearing this on Thursday when it's released. So we had to do some quick notes because there was the announcement that came obviously from the Trump administration yesterday, but also this morning you had Trudeau who did a press conference just about an hour, an hour and a half before we started recording.

[00:00:51] So we both listened to that just to get an understanding of what Canada's counter tariff response was. We'll break that down for you and then we'll be talking about some of the bank earnings. Not all the Canadian banks, but we ended up picking two each, so four in total. And some interesting tendencies that we're going to talk about that we're seeing for the Canadian banks there. So Dan, what's your first impression on the tariffs and counter tariffs?

[00:01:19] I like, I had listened to the Trudeau speech there and it, I kind of liked it. It seemed pretty good. I mean, the one thing I guess I'll say from that is it kind of seems like they're done kind of trying to mitigate it, I guess. I mean, I know they've been trying to over the last few months, but the tone kind of shifted to, you know, how we're going to get through this rather than how we're going to try to mitigate it. So I think it might get a little bit rough here over the short to midterm. I mean, hopefully they don't last very long.

[00:01:49] Definitely feel for the people that are impacted. It's probably going to hit a bunch of jobs here in Canada, probably pretty swiftly depending on what industry you're in. But overall, I mean, it's kind of, you were kind of hoping he would maybe backtrack on him a day or two like he did in February, but it doesn't look to be the case. He's pretty, pretty set on it now. Yeah, exactly. And our heart goes to anyone who might be impacted or will be impacted by this.

[00:02:17] Hopefully there's not too many people listening that are feeling are losing their income because of this. And if there is some loss of income, hopefully it's not for too long or you're able to rebound and find something else. Obviously, there are definitely a human cost to that. And like you said, Trudeau announced at a press conference, he announced that Canada will be imposing 25% counter tariffs on 155 billions worth of US goods.

[00:02:44] It seems like it follows the plan that was laid out in early February when a lot of people thought that the tariffs would be going in place and then they were postponed for a month. And what's interesting is I use that link because it's a page from the Canadian federal government that was posted on February 4th. Extremely extensive. It would have taken me probably days to go through.

[00:03:07] I posted the link into chat GPT and asked it to summarize because a lot of news sites didn't have a really good list of the things that will be impacted. And it did a really good job. And in terms of tariffs, and I will outline what some of the big line items that will be impacted, but of that $155 billion, $30 billion will start immediately and the remaining $125 billion will start in 21 days.

[00:03:33] Now some of the categories impacted here are food and beverages. Items like orange juice, peanut butter, coffee are subject to the 25% tariff. So our alcoholic beverage, wine spirit and beer. I know Ontario and Doug Ford said that he would essentially remove all US products from the LCBO here in Ontario.

[00:03:56] So we'll have to see, I guess I'll have to go to the LCBO in the next few days to get a bottle of wine just to see what kind of selection there is. Just to see if it's actually happening in practice. There are also going to be consumer goods that will be impacted. A variety of consumer products are hit by the tariffs such as household appliances, apparel, footwear, cosmetic.

[00:04:19] And there are some other notable products like even motorcycle paper products, including pulps and paper amongst the other items. The tariffs, Trudeau said that the tariffs will remain in place until US tariffs are withdrawn and not sooner. So it aligns with what you were saying because yes, it seems like there is not too much talk going on right now. He also said that there could be some non-tariff measures imposed in the future.

[00:04:46] And when there was, I saw a post on Twitter or X and it was a pretty big account. I think it was a Kobeschi letter saying that there'd be some additional non-tariff measures and people were asking what are those. So it could be things like simply making it harder for specific US goods to come to Canada with increased like red tape or regulation. It could be a ban on the export of certain critical resources to the US. That could be something nails that levied, that's levied.

[00:05:15] It could be subsidies to Canadian industries or even banning US companies from bidding on certain types of government contracts. So there's a lot of non-tariff measures that could be imposed. He did not specify. So I'm just speculating here just to be clear. But these are just example of things that they could try to lever to put some more pressure on the US.

[00:05:37] He also said that Canada will provide as needed support to Canadian businesses and individuals impacted by tariffs with things like boosting eligibility for people that would be impacted with their work. Provinces will also put on some additional pressure. For example, Doug Ford in Ontario that was recently reelected said that Ontario will be imposing tariff on power exports to the US.

[00:06:05] So essentially, I think the way they'll do it is they'll just increase the rate that they charge US customers for it. So I think that's how they're going to do it because obviously, I know people are probably well versed by now with tariffs. But when the US imposes tariffs on goods from Canada going to the US, it's really those goods that are being imported to the US or the companies importing those goods are paying those tariffs.

[00:06:31] And usually what will happen is it will trickle through and be passed on to the consumer, whether it's individual or businesses. So I think that's important to remember. And the counter tariffs, they will be putting taxes on goods coming in from Canada.

[00:06:49] And I've been very critical on the food aspect of it because unfortunately, like I've said time and time again, those that were the most impacted by inflation are the household that have the lowest income in terms of household because a bigger percentage goes to food. And now you're going to be putting some tariffs on food coming from the US. It's too bad, but these will likely be the household again that will be taking the brunt of it.

[00:07:17] And clearly, everyone will be paying more for produce. I'm not saying that. But when there's a bigger portion of your income that goes to food, you're going to feel it more. Yeah. And I think even for the electricity exports, I mean, you have to think like, I believe New York State would be a big receiver of this. And I believe they're already having a ton of troubles just because of the overall demand.

[00:07:43] I mean, just in overall population, like EV adoption, things like that. So, I mean, this is going to probably hit pretty hard. I mean, obviously, it's ultimately like it's been said for quite a while. It's probably the consumer who's going to, you know, face the brunt of this auto. Like I heard on the news this morning that it could increase the price of a vehicle by $3,000. But then somebody else came across and said it could be up to $12,000. So, I mean, like I think that'll just like you can imagine like nobody will.

[00:08:13] There's going to be two things like people are obviously forced to pay these prices or just nobody's going to buy vehicles, which is really going to hit that side hard. I just don't really see a positive resolution from any of this, really. I mean, it just it doesn't make sense to me. Yeah, I mean, and you're seeing all over the place now economists are revising and pretty much across the board saying that Canada will enter a recession.

[00:08:40] And likely in the first half of this year is what I've been reading, just looking quickly here with the tariffs and counter tariffs. And a lot now you're seeing more and more economists in the U.S. saying that the U.S. has a good chance of entering a recession as well. So it's fast moving. I think a lot of people are putting things out there in terms of what will happen at the end of the day. I don't think no one really knows exactly what the full extent or how this will play out.

[00:09:10] I think we have a good idea. Clearly, it's not going to be great for the economy and there's going to be job losses. But to what extent? Who knows what kind of ripple effect it will have to the housing market, especially in the GTA and in B.C. as well in the Vancouver area. Because if, you know, one of the big reason that people default on their mortgage, one of the leading reason that people default on their mortgage is loss of income. Yeah.

[00:09:38] And if you start seeing, especially in Southern Ontario, more and more jobs being lost because they're really tied, for example, to the auto industry, depending on where people are. And people can't make their mortgage payments. What kind of ripple effects it has on the bank. So there's a lot of moving parts. There's a lot of potential ripple effects that you can see to down the line. I think it's too early to tell.

[00:10:02] I would urge people not to panic and make sure in terms of investment that you have a well diversified portfolio. And well diversified to me is definitely being diversified across asset classes. Being 100% equity, even if you own just high quality dividend stocks, you're likely down quite a bit over the last month or two, even just holding that.

[00:10:27] So having other assets, in my view, like not only stocks, but also a little bit of Bitcoin is what I own. Some short term treasury bills have been performing very well this year because it's very stable and you have a weak Canadian dollar. Gold has been doing extremely well as well. So just thinking of diversifying across asset classes, I think is something that should be on everyone's radar if you haven't done so already.

[00:10:53] Yeah, I think there's been a lot of maybe a little bit of recency bias over the last few years among the stocks that have done exceptionally well, which are for the most part, the stocks that are taking a pretty big hit right now. So I have no doubt that people are feeling the volatility of it. I mean, the thing is, like, even if these don't last very long, I think the it will the ripple effect will stay.

[00:11:17] It's not like they remove these tariffs, they snap their fingers and everything goes back to normal, especially if they drag on for like a month or two. Like there's there's long term impacts here. And yeah, it's it's it's puzzling. But I mean, who knows? The uncertainty and creates right. Right. Yeah, especially with someone like Trump, where it can you can do a 180 within a day. So it's very there's a lot of uncertainty for businesses.

[00:11:45] I think we we've talked enough about tariffs. We have four Canadian banks to talk about, so we don't want to make this too long. So let's start off with TD bank earnings. So do you want to go and tell us what TD saw? And I also have some some charts to show here for joint TCI. I did those custom metrics for each of the bank. I think you've seen them and people following me on X would have seen them as well.

[00:12:11] So I basically did a custom metric where I look at the provision for loan losses, but on the amount of money that banks have on the balance sheet compared to their gross loans. And I think that's the most important metric, because when we talk about loan loss provision increasing banks, putting that aside on a given quarter, it's a good indication that, yes, they're preparing. But a lot of this money may be recouped. Some might not be.

[00:12:39] So what they really have on their balance sheet is a good indicator of the more longer, I would say, short to medium term what they're thinking about. And I'll show how those percentage have been increasing. So I'll show that for TD when you get to that point and all the other banks. Yeah. So relatively, it was relatively in line quarter for TD bank from an expectation basis. Earnings came in like four cents higher than estimates, and they're pretty much flat year over year. Revenue is up 9%.

[00:13:09] So pre-tax, pre-provision income, which is it was up 6% year over year. So they call it PTPP. It's a fairly common metric among the banks as it kind of isolates out provisions and taxes to kind of give a better idea of the underlying business. And a lot of people might kind of view this right now because provisions are very high as a way for banks to kind of isolate this out. But the thing is, let's say, I believe it was 2022 when there was a ton of provision recoveries.

[00:13:38] Those would also be isolated out. So it does work both ways. But you'll see a lot of these banks report pre-tax, pre-provision income. It's really not that surprising. But right now, I think it can be a bit misleading for people looking at that because it paints a rosier picture than I think it is. And I think it's also good to know that all these earnings came out before the tariff announcement. Yeah. Yeah.

[00:14:06] And they're also their outlooks, although they probably would have planned a little bit that these were going to that these are definitely going to come into play. But the bank's efficiency ratio increased 160 basis points on the year. So they sit at 59%. So you want to see a lower number here. It effectively compares the bank's operating expenses to their revenue. So what a 59% efficiency ratio says is effectively that for every dollar in revenue they generate, they have around 59 cents in operating expenses.

[00:14:35] For most banks, what you'll see is a much better operating ratio in Canada than in the international markets. So, for example, TD sits around 40% in Canada and 64% in the United States. So return on equity came in 90 basis points lower year over year. And the bank reported provisions for credit losses of 1.2 billion. This is a 103 million increase quarter over quarter and a 211 million increase year over year.

[00:15:02] So the vast majority of these provisions were impaired loans, which are loans that have had some sort of payment issue. So the bank actually reported a recovery of around 4 million when it comes to performing loans, which are loans that are still being paid. But they kind of estimate, you know, that the macro backdrop, like their outlooks moving forward, they might think that they might go unpaid in the future. There was a lot of if you look to the banks, like when interest rates were rising, most of the provisions were still impaired loans.

[00:15:31] But you also saw like a much higher amount of performing loans just because they don't, you know, the future is a little bit more uncertain. But now that they have a better idea, you're seeing like the vast majority of them are impaired loans. And the bank's total PCL ratio came in at 50 basis points and its total allowance for credit losses came in at 99 basis points. So I kind of like to think of it this way.

[00:15:57] You can think of the allowance for credit losses as effectively a piggy bank and the provisions for credit losses being the money you put in that bank every quarter. So the allowances will be on the balance sheet, whereas the provisions come out of the income statement. So it's kind of like like you had mentioned, it's kind of like a cumulative situation. Yeah. And that which I think paints a way better picture, in my opinion, just because it gives you when you start comparing it to the total of gross loans is you adjust it. Right.

[00:16:27] Because banks have much bigger loan portfolios today than they did 15 years ago. So looking at just the sheer dollar amount on the balance sheet would not really give you that much perspective. Looking at it, comparing to the gross loans. And what we're seeing is those gross loans, that ratio was pretty high in 2020. And for all the banks, it's pretty much the same.

[00:16:52] Went way, way down in 2021 and bottom in 2022. And then since 2022, it's been slowly creeping up and the creep up has accelerated in recent quarter. Yeah. And TD is definitely among the higher banks, I think. Obviously, we're only going to go over four today. I know Royal Bank, which we'll talk about eventually, is much lower than TD. But yeah, 99 basis points. It's up quite a bit from 2022 levels.

[00:17:23] In terms of actual operating segments. So on the Canadian side of the business, revenue was 5% higher year over year. And PTPP came in 6% higher. Expenses increased 5%, pretty much negating most of the growth. So in terms of provisions, the company's impaired loans were effectively flat quarter over quarter, but performing loans jumped a bit. Loans were up 4% and deposits up 5%. So on the US side, adjusted revenue came in 1% higher.

[00:17:52] I believe they're doing a lot of adjustments right now just because of the overall situation. I would imagine a lot of it would be from maybe the sale of Schwab as well. But there's a lot of movements on the US side of the business just because of their AML situation and stuff like that. Because reported revenue actually came in 24% lower year over year, but adjusted obviously 1%. They're probably moving a lot of that stuff out pretty much to restructure its balance sheet. Pre-tax income came in 12% lower.

[00:18:21] Overall net income, 18% lower. And the bank's efficiency ratio came in at 64%. It's 5.5% higher on a year over year basis. And again, we're looking for a lower number there. Expenses were up 11% due to the anti-money laundering situation. And PCLs on the US side of the business were relatively steady. So $371 million in impaired loans, higher by $65 million quarter over quarter, and a recovery of $32 million on the performing side.

[00:18:49] I mean, pretty rough quarter for the bank overall, but I think most people expected it. I mean, they did effectively say, I believe it was last quarter, that they don't expect earnings to grow this year. It's going to be a pretty rough year for TD Bank. It predicts the Bank of Canada will cut rates an additional 75 basis points by the end of the year. Again, this report would have been pre-tariff. I wonder if they think that'll change moving forward. This is what a lot of these banks will construct provisions out of.

[00:19:19] Obviously, it goes much, much deeper than just policy rates, but their outlooks on policy rates certainly do have an impact. Again, I think if the tariffs stay in place for even a short duration of time, I think that 75 basis points might be conservative. But overall... It's hard to say. The Bank of Canada has said it pretty explicitly, is they're going to have to juggle a weaker economy with potentially rising inflation.

[00:19:45] So I think, you know, I understand where they're coming from, the big banks. But the reality is, it's really hard to know which way they'll go. Are they going to be putting more emphasis on trying to get inflation in control if inflation does pick up? Or are they going to put emphasis more on simply just trying to support the economy? I think it's too early to tell, in my opinion.

[00:20:08] Yeah, I mean, I guess the one benefit would be, I mean, if you actually believe headline inflation numbers, we're a lot lower than the US. I mean, we're probably in a position where we can withstand it a bit more. Because what is the... We're at 1.9%, probably going back up to like low twos once that GST holiday is over. But I mean, the US is still north of 3%, I think. So, I mean, it's definitely a tough, tough situation to navigate right now.

[00:20:38] Yeah, no, exactly. We'll move on to the smallest of the big six. National Bank, who just got a little bigger. I think the acquisition of Canadian Western Bank closed in early February. So it would have closed right after this quarter ended. So just keep that in mind, because it would not have the assets of Canadian Western Bank, which will look a bit differently.

[00:21:04] And we'll probably have to talk a bit more about adjusted earnings when it comes to National Bank to make sure we factor that in when looking on a year over year. I'm sure they will do it when they release their earnings. Now, during the call, start with that. Laurent Ferreira. And I'm probably butchering his name, but the last name. Ferreira? I think is what I would. Ferreira. Yeah, Ferreira. It's probably Laurent Ferreira. I'll say it in French.

[00:21:29] So, and it's funny because I posted the quote that he said during the earnings call. Got a lot of traction on X. I didn't expect that. But he did not mince words about the situation Canada is in right now. This is the first paragraph of his opening statement during the call. And I'm reading word for word here. Canada's economic performance is falling behind the U.S. and other G7 nations.

[00:21:56] There has been considerable decline in our productivity and GDP per capita coupled with insufficient investments in manufacturing and R&D. Canadian companies are facing excessive regulation and oversight. So, clearly did not mince words when it came to the Canadian economy. Also, he was also mentioning that Canada should remove all interprovincial trade barriers, which I think a big portion of it.

[00:22:23] There was an announcement that some of these will be removed, but not all. He also mentioned increasing investment in key areas in Canada and remove unnecessary red tape. So, this was within the first few paragraphs. So, clearly very vocal about it. Not all the Canadian banks are that vocal. Let's be clear. I listened to the call from CIBC as well, and they were much more politically correct in their way to say that.

[00:22:52] Definitely saying more. I think both countries have to work together, but not trying to single out anything like that with National Bank. I think you can read between the lines a little bit. Adjusted net income was up 14% to just over a billion. The adjustment obviously factor in some items related to the Canadian Western Bank acquisition because they would have had costs relating to that before the closing of the transaction.

[00:23:19] The CET1 ratio, which is a key measure of the bank's financial strength and ability to absorb losses, was slightly down to 13.6%. The provision for credit loss is more than doubled to $254 million. PCLs actually increased for both performing and non-performing loans. They cite uncertainties around U.S. tariffs and global trade, clearly for good reasons.

[00:23:46] In terms of segment, all segments perform well with increased revenue and pre-tax provision earnings. What was interesting is the smallest increase was personal and commercial banking in Canada. Obviously, they're predominantly in Canada here. Net interest margins for personal and commercial banking was down 8 basis points versus last year. Not a big change, but you definitely want to be keeping an eye on interest margins when it comes to loans.

[00:24:13] Obviously, banks will have income from fees from other sources, but interest margin is still a big reason. It's typically the main reason that bank exists is making that interest margin, that interest money. Total loans increased 7% while total deposit increased 12%. So that's something you want to see as you want to see those deposit increase as well.

[00:24:38] 43% of their loan portfolio in mortgages and home equity lines of credits and two-thirds of that is in Quebec, while the rest is pretty much only in Ontario. 90 days plus delinquency rates on mortgages remain low, but are the highest since 2020. And the 90 day plus credit card delinquencies rates are at the highest they've been over the last five years. So you're starting to see those trends creeping up.

[00:25:05] I wouldn't say that it's alarming right now, but it's definitely on the way up. And if I look at the last ratio here, when the one we looked at for TDs, so the provisions for... Yeah, what's that? Allowance for loan losses, yeah. I imagine it's been good. Yeah, exactly. Yeah, the allowance for loan losses on the balance sheet. Sorry, I was looking for that word here. Compared to their gross loans. So it's the same thing for National Bank.

[00:25:31] A bit on the lower end, they're at 0.6% right now compared to the TD that was just below 1%. On the lower end, but again, you're seeing the same tendency of these provision, that ratio actually going up. So it bottomed around 0.47% for those that are just listening and not on joint TCI. Around, again, mid-late 2022 and then has been creeping up ever since.

[00:25:59] My expectation, again, is that we will continue seeing that creep up, if not accelerate in the coming quarters. That would be my prediction. Maybe it will happen, not happen. But that's my prediction for pretty much all the Canadian banks here, just because of all the uncertainty that we have right now and all the ripple effect that we'll see in the economy. And on that note, what are your thoughts about buying Canadian banks right now? Just quickly before we move on to Royal Bank.

[00:26:27] I have my thoughts, but I don't want to influence you. So I want to hear what you have to say. I actually sold a good chunk of them at the end of the year. I mean, I still own my own National Royal and then Equitable. But I mean, Equitable, I think, is in an entirely different area of its own just because it's more deposit-based and kind of like they don't have the big capital market segments or things like that as the other banks. But I mean, I- Less overhead too. Yeah, exactly. Like they're digital only, right?

[00:26:56] Like I do view it as kind of, it's a separate business really relative to the big six. I sold chunks of Royal and National at the end of the year. I just felt they were way too expensive. Obviously right now we're seeing National, like that allowance percentage, like, you know, it's flat, it's flat, it's flat. And then it spikes up like National. I follow National quite a bit. It's had a few quarters of PCLs that were much higher than expected. And it's kind of the same with Royal.

[00:27:26] For quite a while, like a lot of these banks with high Canadian exposure were kind of doing the best. Obviously in 2024, I would say National, CIBC and Royal were the best three performing. But now we're starting to see a little bit of an uptick. I mean, I just hold them. I'm kind of allocated, you know, I think 6%, 7%. I wouldn't add anymore at this point in time, but that's kind of something I've always kept.

[00:27:51] I don't see the environment getting any better in terms of the Canadian sides of the business. But I mean, I do feel also that the market, you know, they price a lot of this stuff in. Usually, unless there's some sort of large shock. And I mean, National, the last few quarters, it's been quite a big increase. It's definitely something to keep an eye on, but I don't have any worries over the long term.

[00:28:17] Yeah, I mean, I've always been pretty critical of banks as investments. So I think what I say with a grain of salt. But for me, look, at the end of the day, I think right now, the banks, I agree with you, they've had quite the run up and there is a lot of uncertainty ahead. And I think there's a lot of their net income, their profits that are looking good. But again, I think my view is that they're not provisioning enough for what's going to happen.

[00:28:46] And you're going to see a ramp up in provision, which will as a high probable, it's a high probability that their income will come in much lower than a lot of people expect in the coming quarters, if not years, because people are not factoring in these additional money for PCLs to be put on the balance sheet. Yeah, because this is all the banks themselves, right? This is all predictions. This is all like we've seen it. It would have been during the pandemic.

[00:29:16] Scotiabank was really conservative with the amount of loans it set aside. And then it got hammered like over two or three quarters. We've seen a huge, huge jump. And then you look on the opposite side of things like CIBC in 2022 was putting aside a ton of money and clearly put aside maybe too much. And then in 2024, I mean, the provisions were coming lower and lower. And you've seen the bank just kind of it killed it in 2024. So like it's all over the map. I mean, they can overpredict.

[00:29:45] They can underpredict. Yeah. And I mean, it's very tough. Like, you know, it's hard to predict the direction of the economy as a retail investor when even these banks can't do it with any sort of reasonable accuracy. Yeah. Yeah. And most of them have a lot of exposure to the Canadian housing market. And as we were talking early on, there could be a lot of ripple effects that are felt in the housing market that could affect a lot of the loans, a lot of the mortgages they have on the book.

[00:30:15] And I just wanted to mention that because I think a lot of especially income investors focus on the Canadian banks. And they tend, from what I've seen, to focus on just earnings and not factoring in that the earnings might be looking pretty good this quarter. But it could be a completely different picture just as soon as the next quarter. So just something to keep in mind because I had people asking, oh, are these banks a buy?

[00:30:43] I'm like, look, I'm not going to give you investment advice, but I think you just have to be careful right now just because there's a lot of uncertainty. And they're trading still, like, pretty high. They're not that far off from their recent highs either. So that's my take on it. Yeah. Yeah. And I mean, that's one of the main reasons I sold Royal Bank. Like, some of it, I still own it. But, I mean, it was sitting at, at the end of the year, it was sitting at, like, multi-decade highs in terms of valuation. So I just trimmed a bit and it's had a bit of a pullback.

[00:31:13] But I think, like, you know, if you're going to buy them, could you get a better opportunity later if things get tougher? Yeah, probably. But I think they're solid long-term holds. I mean, will they have the run-up post-financial crisis? Like, they killed it for that, you know, for a very long time. Will they do that again? I don't know. I would say probably not. But I know some people who are very, very heavy Canadian banks. I mean, I know some people who it's a third of their portfolio.

[00:31:42] I wouldn't necessarily do that. I mean, even, like, 7% for me is relatively high. But, I mean, ultimately, it's your portfolio. But there is a lot of love for these bank stocks. And they've, you know, who knows? Okay. So now let's move on to Royal Bank. And then I'll finish up with CIBC after that. Yeah, so Royal, they put up some pretty strong headline numbers. So double-digit beat on earnings expectations. Revenue was around 8% beat.

[00:32:12] But the stock was relatively flat. And I do think this is from that, you know, as I had mentioned, we were sitting at multi-decade highs in terms of valuation. So it's really not all that surprising. Plus, the company, they did take a pretty steep jump in terms of provisions on the quarter. So earnings grew by 27% year-over-year. Loans were up 5% on the personal side of the business, 10% on the commercial side. This isn't including HSBC.

[00:32:40] That's ex-HSBC. Deposits were up 8%. If you factor in HSBC, the numbers look huge. But really, it's due to the acquisition. So I, you know, I like using the ex-HSBC. It's effectively adjusted results. The bank's efficiency ratio came in at 54% bank-wide. And it has an industry-leading 38% efficiency ratio in the Canadian segment. Return on equity, 17.2%, which I'm pretty sure is the best out of all the banks as well.

[00:33:09] CET1 was 13.2%, which is well above regulations. I think regulations are 11% or 11.5%. Pre-tax, pre-provisioned income came in 45% higher than the first quarter of 2023. And when we look to actual provisions, they came in at 1.05 billion. Impaired loans saw a big jump on a quarter-over-quarter basis. So they jumped by 340 million to sit at 985 million. And performing loans declined by 65 million.

[00:33:37] Not a recovery, just a decline on a year-over-year basis. And 140 million on a quarter-over-quarter basis decline. The company's total PCL ratio came in at 42 basis points. This is up 5 basis points year-over-year and 7 quarter-over-quarter. I mean, obviously, the large quarter-over-quarter increase really isn't all that surprising because of the large jump. And allowance for credit losses now sits at 68 basis points, so 0.68%. Again, if we look back to TD, we're looking at 99 basis points, effectively 1%.

[00:34:06] So you can see the substantial difference here versus a company like TD. And again, this doesn't necessarily mean a bank is higher quality than another. Like we talked about, it could simply mean they're being more conservative, more aggressive with the provisions. And we've witnessed multiple situations over the last couple of years where banks play catch-up all the time, or they maybe went a bit too much and they could scale back. Much like every other bank, though, I guess I didn't mention on TD. Wealth management, capital markets, they're seeing just huge growth.

[00:34:35] Wealth management earnings are up 48% year-over-year. Capital markets, 24%. Obviously, with the stock market doing what it's doing. This is going to be, you know, it's obviously going to be a cyclical portion of the business. Obviously, it's not going to grow earnings by 48% and it's wealth management, you know, indefinitely. Commercial side, revenue was up 10% year-over-year and pre-tax income 9%. These numbers, along with the personal side, just don't use, don't integrate CIBC yet.

[00:35:02] The company's gross impaired loans jumped by double digits across both the personal and commercial side of the business, mostly due to residential mortgages and the transportation sector on the commercial side. And then the company's total PCL ratio on impaired loans came in at 39 basis points. I'm pretty sure this is industry leading as well. TDs was around 56 basis points. I believe I looked at BMO yesterday. They were around 50 basis points just for a little bit of a comparison.

[00:35:31] And the company did seem to downplay the big spike in provisions. They kind of said they were in line with expectations. And as I mentioned, I think this was the reason the company took a bit of a dip post earnings because overall, like the headline numbers were very good. Yeah. Yeah. I think personally, Royal Bank could be in some trouble in the next year or two, mostly because of some of the loans that they have going in the GTA, mortgage loans, where there is now it's pretty well documented.

[00:36:01] I know Dan Foch was doing some work over the last year and a half on that. It was pretty early on it. You don't have to look very, very far. I mean, just do some searches. You'll find that there's a lot of pre-construction, whether they're condos, whether they're single family homes, a bit further outside in the GTA, where Royal Bank is doing blanket appraisals

[00:36:25] based on the appraisal that had been done at the time of people or household putting deposits on the home, whether that was two, three, four, five years ago, instead of the current market value of these pre-construction that are being finalized. So that's something you should not be doing. I'll just be honest. It could be some big issues there. And TD is not TD, but Royal is definitely one of the ones that I'm the most concerned

[00:36:55] about for that reason is I I'm not quite sure that they're being fully transparent on the state of their their loan book. And we'll see if there's usually where there's smoke, there's fire. So if that kind of comes to fruition, you could be see those provisions really, really spike up in the next year or two. So would this pretty much be like they their loan to value would probably be negative if they had actually reappraised it? Yeah. Yeah. Yeah.

[00:37:24] But instead they're using the yeah, because a lot of those condos are worth 30, 40 percent less than. Yeah. Could be. Yeah. Depending on where it is, like the GTA is one of the areas the hardest hit right now in terms of home prices compared to the peak. And yeah, you could be someone that put a deposit based on that purchase price of a million dollars. And that was three, four years ago. Just an easy example. So let's say that was four years ago.

[00:37:52] And now the condo is about to be finished in a couple of months. And its actual appraised value would be 700,000. But what what the blanket approval does is they they approved the loan based on the appraised value of a million four years ago. So that's where. Yeah. That's where it can. They can get into trouble, especially. It's fine if people are making their payments because then it's not an issue.

[00:38:20] But if you start getting more and more people defaulting on those payments and if some of them, depending whether I'm not quite sure whether they're CMHC insured or not. But if they're not, then the bank can have a pretty big problem on their end if it's you know, if there is a lot of default starting to happen. Yeah, that's the one thing about a lot of these banks is, you know, if the mortgages are insured, they'll effectively be reimbursed.

[00:38:48] And then I'm pretty sure CMHC goes and goes after the the buyer effectively. I mean, I'm pretty sure they can, you know, garnish your wages and things like that in terms of, you know, recouping the costs. So it's hard to tell how many of those mortgages would have been insured. I would imagine they would have preferred them to be insured. But who knows? Yeah. Yeah, exactly. So anyways, that's just just a general idea. Whether it happens or not, we'll have to see. But it just I don't know. Right.

[00:39:16] Like the whether the banks are being fully transparent or not. So it will have to see. And usually this stuff comes out after the fact. It may be a couple of years, four, three, four or five years down the line. But it is there's definitely for me, from my perspective, Royal is definitely one where there is cause for concern. Anyway, so not to scare people too much. It's just that's just you can do your own research. I'm just putting it out there.

[00:39:44] Now, CIBC, Victor Dodig, sorry, was who's the CEO of CIBC, was definitely less vocal than National Bank. But he did say that they are a strong believer in free trade and fair trade on the call. He urged political leaders on both sides of the border to work together to secure the North American economy. Revenues were up 70% while adjusted net income was up 23%. Similar to National Bank, all their segments saw an increase in net income.

[00:40:14] Interest margin on interest bearing asset was up six basis point year over year, but flat quarter over quarter. And the CET1 ratio was a 50 basis point year over year. Gross loans were up 7%. Deposits were up 9.6%. In terms of bad loan, things keep getting a little bit worse every quarter. It's nothing alarming from CIBC based on what they release.

[00:40:42] Mortgages with 90 day plus delinquency were up six basis point versus last year to 0.31%. So it's still relatively dope. And that is one thing I would urge people to keep in mind. I know there was an Equifax report that saw some pretty big increases in delinquencies in Ontario specifically. But again, that's going from a pretty small base. So you have to keep in mind that yes, even though you may have a double of delinquencies,

[00:41:12] if you're going from 0.11% to 0.22%, it's still not massive. I think you always have to take that into context. Credit card delinquencies of 90 day plus were up nine basis point to 0.87%. And personal lending delinquencies was up 6% to 0.59%. And the allowance for loan losses, if you go from based on categories, they were pretty

[00:41:39] stable with the exception of credit cards that went up from 4.2% to 4.9%. And that's been a spot where you're seeing these delinquencies rise pretty rapidly is the credit card area. We've talked about that with Canadian Tire. And if you look at all the banks, I think it's, I haven't looked at all the banks, but I would assume that it's across the board, something that you're starting to see. Yeah. And I mean, it's going to be, if you really think about the priority of debt, it's probably going to be the last one you pay.

[00:42:08] So, I mean, it's not really all that surprising. Like if you have a mortgage and a car loan, I mean, are you really, if you could only pay a select few credit cards, probably going to come in last. So that's really not all that surprising. The one thing I was looking, I was actually, while you were talking, I was looking up Dan Foch's Twitter because he posted, this looks like it's from CIBC's report just because of like the coloring, but it said insured mortgages now have the highest delinquency rate in Canada.

[00:42:34] So they, it was 39 basis points, whereas uninsured mortgages were 31. Yeah. And uninsured mortgages in the GTA went from 21 basis points to 36 basis points in, in a little over a year. So, I mean, CIBC is the. When did he post that? I think you posted it after I texted. Three hours ago, three hours ago. Yeah. Yeah. I saw it this morning and I kind of, I I'm like, I'm pretty sure like just like the branding

[00:43:01] that looks like a CIBC report, but God, I lost my train of thought now. I can't remember what I was going to say, but oh, that's okay. No, I BC. Yeah. I believe Royal has more mortgage exposure overall, but CIBC, I'm pretty sure as a percent of assets in terms of Canadian mortgages is one of the highest exposed. So it's definitely something. I think it might be the highest. I think it is like as a percent of like, obviously RBC will have more mortgages total because they

[00:43:29] have probably triple the assets of CIBC. But this is definitely one that's a residential mortgage sensitive, even commercial mortgage sensitive in Canada. Yeah, exactly. So I think this is what Dan was talking about here. Dan Foch, not to be confused with Dan. Can't, I think would be this table. Yeah, it was. Yeah. Yeah. Yeah. So I, I sent that to him about three, four hours ago. So I think when he saw it, he posted it, but yeah, that's one thing.

[00:43:57] And the other thing that's really important to note here is the uninsured mortgages in the GTA. That one has a big spike too. So it went from 0.21% to 0.36%. Again, I think what we're seeing in terms of a lot of distress when it comes to housing market, unfortunately, a lot of it is in the GTA area, even more so than the greater Vancouver area. Yeah. I mean, you got to think like those uninsured mortgages in the GTA.

[00:44:24] I mean, first off, how much has the real estate fallen in value? And there's no recourse here. Like it's an uninsured mortgage, right? Like the bank will just be left with a home that might be worth less. Yeah. Although like, I don't know because it. Well, yeah. I mean, it really depends the loan to value. It would have to be over 20% for it to be uninsured. Yeah. So there probably are right there. And again, yeah. And the remaining mortgage, right? Maybe the loan to value might be 50%, for example, at that point.

[00:44:54] So it depends. Like even if the house goes down 30%, they're still not underwater. So you have to obviously like take things into account. But one of the things that I'm going to push back a little bit on CIBC here is they have Canadian mortgage renewal profile, a three-year outlook, and they're doing it on a 4% and 4.5% rate. I'm going to try to make it a little bigger here for those on joint TCI.

[00:45:20] And you'll see that, you know, it looks pretty manageable for 2025, 26, 27. They're putting their monthly payment increase for their mortgage holders as $81 if they're renewing at 4% and 159 if they're renewing at 4.5% for this year. Next year, it's $103 and then $196 and $98 if they're renewing at 4.5%.

[00:45:49] It may not sound like a lot. But the problem is when they're doing these calculations, I'm not quite sure where they get all these numbers. But I did some calculations. And I can tell you that the amounts are much larger than this. So I think what they're doing is they're blending variable and fixed together. But the reality is about 75%, 80% of the mortgages that we're taking during the 2020, 2021 era

[00:46:14] were still fixed rate mortgage at five-year term. And a lot of these mortgages will be going from 2.5% to 4%, 4.5%. So I did some rough calculation on a house that would have been bought in 2020 or 2021 for around $500,000. Obviously, it depends where you are in Canada back then. But I think for most areas in the country, that should be respectable aside from the GTA and greater Vancouver area.

[00:46:44] And I took a 2.5% rate back then. And just assume that say the buyer, it's an insured mortgage. They put 10% down. So they had a $450,000 mortgage over 25 years. So that meant that their payments were slightly more than $2,000. So 2015. Now, after the five-year fixed term, they would have a balance on that mortgage of $380,000 with 20 years left in amortization if they continue the same schedule.

[00:47:12] If they renew at 4%, their payments are now $2,300 if we round up $2,296, which is an increase of 14%. If they renew at 4.5%, their payments are now $2,396, which is an increase of 19%. So it's not as rosy as what they're painting. And obviously, I think they're doing it for variable as well.

[00:47:37] Because what's happening is the way they're probably doing these calculations is people that are renewing variables actually may see a decrease in payments. Because they've already seen the increase in their payments during the length of the mortgage, right? If you didn't have a fixed payment variable, if you had a variable payment, variable rate, then you would have seen your cost go way, way up during the pandemic.

[00:48:06] And now it's slightly coming down. So I think those numbers are a bit misleading. In reality, I think a lot of people will have an increase of probably 15% to 20%, depending on when they took out their mortgage during the pandemic. And it also doesn't exclude the other costs in their life that have gone up, whether it's insurance, whether it's food and all these other things. So has their salary gone up, their income gone up as much?

[00:48:34] I think I would probably venture to say no in most cases. So yes, there is definitely going to be some stress on households. Will it be very widespread? Hard to say. I think the majority of people will probably be okay. But again, I think it's the numbers they put out there. I think a bit of a head scratcher. I'll just say that. Well, and I think the 4% renewal rate is also a bit, I don't know the word for it.

[00:49:01] But anyway, you can't even get close to that right now with CIBC. Like right now, they're 4.75% on a five-year fixed. And that would be insured. So as soon as you go uninsured mortgage, you're probably closer to 5%. So I mean, I guess this would be 2026 and 2027. So maybe you could say that 4% renewals might be a bit more accurate in 2026 and 2027.

[00:49:26] But I mean, as soon as I noticed, like as soon as you said 4% renewal rate, I'm like, there's not a big bank right now that's offering close to 4%. I don't think kind of five-year fixed. I think they may be pretty close. You think? Yeah. If you like, yeah, one of the sites I do like is Wawa to compare the rates. Oh, the mortgage rates. Yeah. Yeah, because what tends to happen is the banks, their posted rates are usually not going to be like their best rates.

[00:49:53] So if you look at this and this column here, so the first one, there's insured rates. So the best rates are definitely in the high threes, low fours. So that's just, yeah, because obviously the banks won't necessarily pose the best rates on their side. You usually have to push a little bit or threaten to go somewhere else when your term comes up. So you can definitely get 4% to 4.5% depending on whether you're insured or insurable.

[00:50:21] So it is possible. But again, this could definitely vary quite a bit in the next couple of years, especially with government bonds being super volatile in the last little while. So it's hard to say where they'll be going. But I'll give them that 4% and 4.5%. As of right now is realistic. But again, that could change quickly. Definitely. Definitely. I mean, CIBC has had a pretty good run of it over the last while, but it's going to be one.

[00:50:50] I think it's going to be probably the most important one to focus on, especially on the mortgage side of things. It's pretty sensitive when it comes to that and just the Canadian economy overall. Them and national, I would say. Yeah. No, it'll be fascinating. I know a lot of people own banks, so clearly, just make sure you know what you own. And I think that's probably the biggest takeaway here is don't just have it in your portfolio and just think, oh, they're Canadian banks. They'll be fine.

[00:51:18] I mean, we're entering a period of uncertainty that we have not seen in a very long time or if ever in the past 60, 70 years. Even if you look at the great financial crisis, I mean, Canada, even though we had a recession, it wasn't anywhere near as close to the U.S. And the Canadian banks were largely insulated. They actually use the great financial crisis, the aftermath, to buy a lot of U.S. assets.

[00:51:48] So, I think people, I think it's important that you understand what you own. I see way too many people on Twitter, X, or different investing platforms just kind of, I can tell they have no idea how banks work. No. And they have it and they have it as an outsized portion of their portfolio. And then they'll quote the, you know, oh, this bank has raised their dividend for the last 100 years. Like, who cares what happened 100 years ago? Like, what world are you living in?

[00:52:15] And that's the one thing I want to caution people is what happened in the last 15, 20, 30, 40, 50 years. It does not mean that the same thing will be happening going forward for the nice 5, 10, 20, 30, 40 years. And I think that's something that as investors, it's hard to wrap your head around things being different than what you're used to. But we're at an inflection point, I think, right now.

[00:52:43] Now, just geopolitically, we're seeing the geopolitical world completely shift. And the U.S. is no longer the dominant power. And I think we're going to see some big changes in our financial system in the decades to come. Yeah. Well said. I mean, it's, like you said, very hard. Like, even you and I don't understand in depth how these banks work. Like, they're crazy. No, exactly. Crazy complex.

[00:53:10] And, I mean, you can get a relatively decent understanding. But I do agree that a lot of people, not a lot. I would just say some. You know, the intricacies of them, they're very complex businesses. I mean, just know what you own. Yeah. No, exactly. Well put. So, I think we'll leave it there. I know I did a few shots fired here in this podcast. But that's okay. I mean, at the end of the day, you know, we try to go over the earnings. But we provide our opinion, too.

[00:53:40] So, that's the podcast. But thank you, everyone, for listening. We'll be back next week. I'm sure there's going to be some more news on the tariffs. I just saw, actually, before we – sorry, it was just as you were reading the last segment. I just happened to double-check. I'm like, oh, I wonder if there's anything that happened in terms of tariffs. Now, apparently, Trump is threatening to increase the tariffs on Canada following the response. So, we'll have to see what happens.

[00:54:10] But we may have some more developments on that front. Well, and there was something I read on X last night with Doug Ford. Like, he had mentioned the electricity. And then there was something, some sort of – I couldn't find it. I tried to look it up today. But there was something, like, along the lines of limiting cloud usage. So, I would imagine that would fall to big tech, like, for Canadian businesses and Canadian companies.

[00:54:35] Like, he could counteract with that, which, I mean, I don't even know the impacts of that. I imagine – Who would counteract with that? Trump? I would imagine an executive order or something on these companies, like, limiting – Like, it would – it seemed absurd to me. But then when I thought if it could actually be done, how devastating that would be. But, yeah. Oh, yeah. I mean, yeah. I couldn't imagine it. But who knows? It's just like there's so much information.

[00:55:03] It was from not any sort of reliable source. But I just kind of thought – I kind of thought of it. I'm like, wow, that would be crazy. Crazy. But, yeah. You're going to see a lot of information over the next few weeks. Yeah, exactly. Those are the times we live in. So, you know, by a click of a button, the president of the U.S. can just make markets, lack of better words, just go fluctuate very quickly. So, you know, I think there is volatility.

[00:55:31] And as investors, we just have to get used to it because I think there is just going to be a steady diet of that over probably the next three and a half years. Absolutely. Enjoy. But thanks, everyone, for listening. If you haven't done so, if you can leave us a five-star review, that definitely helps people to find us. You can find me on Twitter at fiat underscore iceberg and Dan at stocktrades underscore CA. Thanks for listening, everyone. That, yeah, thanks for listening. We'll be back next week.

[00:56:01] The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.