The price of oil is flirting with $50 $50, which has to be good news for Canadian banks.
It’s true that double-digit growth was hard to come by in the second quarter for these bank stocks. In fact, Q2’s results were downright pedestrian.
Concerns about oil and gas loans combined with individual issues helped keep the earnings season from taking off for these bank stocks.
Still, it wasn’t a bad earnings season for Canadian banks. Who did the worst? Who managed to produce a win? Where to from here?
Read on to learn more about how these five Canadian stocks did during the past quarter.
Canadian Banks: Bank of Nova Scotia (BNS)
The last to deliver earnings among the big Canadian banks was Bank of Nova Scotia (BNS), which announced second-quarter results Tuesday morning, long before the markets opened for trading.
With the biggest exposure to oil and gas among these banks — with almost $16.3 billion Canadian in outstanding loans to oil and gas concerns with another $11.4 billion Canadian in commitments — Scotiabank’s results give us a good indication how the banks are coping with troubles in the oil patch.
BNS reported adjusted net income in the second quarter of C$1.86 billion, 4% higher than a year earlier after accounting for a C$278 million restructuring charge for structural cost reductions in its Canadian banking unit — which incidentally had a good quarter, delivering a 6% increase in net income year-over-year. Its international banking unit had an even better quarter with net income up 12% year-over-year.
The only negative was in its global banking and markets segment, which saw net income decrease 12% in Q2 2016 on higher provisions for credit losses in the energy sector. Overall, BNS’ provision for credit losses totaled C$752 million in the second quarter, a 68% increase from a year earlier. As a percentage of average loans, that represents 0.64% of its total, up 23 basis points from Q2 2015.
Overall, BNS had a reasonable quarter and its oil and gas exposure doesn’t appear to be causing it too much concern. Although the banks will likely continue to increase their provisions in 2016 for credit losses in the energy sector, it appears these problems shouldn’t become debilitating.
Canadian Banks: Toronto-Dominion Bank (TD)
On to Toronto-Dominion Bank (TD) where if you judge a book by its cover — or in this case, bottom-line earnings — it won the Q2 earnings sweepstakes with a 10.2% increase in year-over-year profits to C$2.05 billion.
However, adjusting for one-time charges, etc., its growth rate wasn’t nearly as impressive, up 5.1% from Q2 2015.
Most of TD’s growth in Q2 came from its U.S. retail business, which saw loan volumes and deposit volumes up 13% and 10% respectively year-over-year. Adjusted earnings for its U.S. Retail division including currency were up 15% in the quarter to C$719 million.
Exclude the loonie effect and the increase is less than half that number at 7%. Still, outperforming its Canadian retail business by 500 basis points is a good showing nonetheless. With the U.S. economy continuing to slowly return to pre-2008 levels, expect more good things from its American operations.
However, like all of these Canadian stocks, the level of bad loans increased in Q2 due to troubles in the oil patch. At the end of the second quarter, TD had C$6.6 billion in loans outstanding to oil and gas companies, C$442 million more than in Q1 2016. They represent approximately 1.1% of its total gross loans. Of the C$6.6 billion, approximately C$211 were impaired in Q2 2016.
Overall, TD delivered a pretty solid quarter.
Canadian Banks: Royal Bank of Canada (RY)
Royal Bank of Canada (RY) had a total of C$8 billion in oil and gas loans outstanding at the end of the second quarter, $1 billion higher than a year earlier in Q2 2015.
Those loans represent just 1.5% of its total outstanding, which as a percentage is flat year-over-year. In addition, it currently has C$11 billion in undrawn lines of credit, etc.
Of the drawn and undrawn loans, 19% and 58% are investment-grade clients, respectively.
RBC’s bad loans increased by 19%, or C$583 million, in the second quarter. In comparison to some of its peers, its exposure to oil and gas is quite reasonable. Perhaps that’s one of the reasons why its adjusted net income in Q2 2016 was up 7% year-over-year to C$2.57 billion.
Also making a significant contribution was City National Bank, which added C$66 million in earnings to its wealth management segment in the second quarter. Insurance also played a part in the increase, but without the 4% rise from its Canadian Banking business to $1.24 billion, the quarter wouldn’t have been nearly as attractive.
Canadian Banks: Canadian Imperial Bank of Commerce (USA) (CM)
The good news over at Canadian Imperial Bank of Commerce (USA) (CM) was that its adjusted net income in the second quarter increased by 4.1% to C$926 million. On a per-share basis, it delivered adjusted earnings of C$2.40, nine cents better than analyst expectations.
Its retail and business banking division saw net income increase 12% year-over-year to C$652 million. Wealth management, the car that’s driving many banks these days, saw adjusted net earnings increase by 7% after excluding revenue lost from selling the company’s stake in American Century Investments. Overall, shareholders have a lot to be happy about at CIBC.
Unfortunately, the bad news from the oil sector is a common theme at the big bank stocks this year. In CIBC’s case, it saw gross impaired loans from the energy sector climb precipitously from just C$25 million in Q2 2015 to C$708 million in this year’s second quarter. As a result of this increase, the bank upped its provisions for bad loans by 44% to C$284 million.
Canadian Banks: Bank of Montreal (USA) (BMO)
First, the Bank of Montreal (USA) (BMO) announced mediocre earnings May 25; then it let staff know 1,800 jobs (about 4% of employee count) would be cut in the near future.
So, how do you think BMO did in the second quarter?
Well, on an adjusted basis, it managed to eke out a 1% year-over-year increase to C$1.15 billion. But when you look more closely at each of its operating businesses, it’s easy to see that its wealth management business was the major disappointment in Q2 2016, delivering adjusted net income of C$158 million compared to C$265 million a year earlier.
If it hadn’t taken a C$79 million after-tax write-down of an equity investment and its insurance business hadn’t performed so well in Q2 2015, BMO would have delivered better results than a 1% bump.
Add to this the fact that its gross impaired losses in Q2 2016 were 0.62% of its total loans outstanding and you’ve got a bank that need not fear what’s happening in the oil patch.
That’s not to say BMO is not having issues with its oil & gas clients, but given they represent such a tiny piece of the company’s loan portfolio, any further weakness in its stock price could be a strong invitation to buy.
So despite the woes in the energy sector and a Canadian economy that’s less than robust, if Q2 2016 is any indication, bank stocks are still doing alright.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.