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It's the last season of quarterly results for the big banks in 2018, when Canada's largest lenders are unveiling to investors how much money they earn and where.
The Bank of Nova Scotia launched its results on Tuesday with quarterly results, revealing that it had gained $ 2.27 billion over the three-month period ending in late October. Royal Bank of Canada followed suit on Wednesday with a quarterly profit of $ 3.25 billion for the same period.
The Toronto-Dominion Bank and CIBC figures arrive this morning, followed by the Bank of Montreal, which will close the quintet next Tuesday.
The big banks are considered canaries in Canada's economic coal mine at best, and this rebate is being watched even more carefully than usual. Anyone trying to find out how the wind is blowing for the Canadian economy is well advised to pay attention to what the bank figures show about three key elements.
What is their exposure to oil?
After rising for a good part of the year, the oil market collapsed in the last two months and Canadian oil was hit harder than any other crude. The price of oil that receives the most attention is the US benchmark, known as West Texas Intermediate, which has lost a third of its value since early October and is now trading just $ 50 per barrel.
But the heaviest blend of oil sands crude known as Western Canada Select (WCS) is far more important to the Canadian economy. It has dropped 70% since the beginning of last month, at one point it was trading for less than $ 14 a barrel – less than it costs to produce it.
"Oil producers with a high exposure to western Canada are likely to experience a significant deterioration in their cash flow," the credit rating agency DBRS Ltd. warned.
This is bad news for the banks that lend them money. That's why some badysts who oversee banks have looked at oil risk.
Scotiabank said Tuesday it lent $ 14.8 billion to the energy sector, accounting for only about 2.6% of all loans outstanding. Of this amount, only $ 1.2 billion was loaned to companies exposed to WCS, which is why the bank's executives had confidence in the future.
"We are very proud of the bank names," said Dieter Jentsch, head of Scotiabank's global banking and global markets, during a phone conversation with badysts. "I am confident that this will withstand a period of instability."
Royal Bank has announced that it has a similar amount of loans, $ 1.3 billion, to businesses whose wealth is tied to the Western Canada Select Award. While the vast majority of these loans are still considered good quality, RBC's Risk Manager, Graeme Hepworth, has pointed out that much of the drop in oil prices does not go unnoticed. had occurred only in recent weeks. numbers ending in October. That's why the bank expects "additional losses" related to oil that could occur during the quarter, he said during a phone call with badysts.
Even if neither Scotiabank nor RBC were red warning signs regarding their exposure to oil, it should be telling to see what other banks have to say on the subject.
How much do they have on the housing market in Canada?
Given their disproportionate role in the mortgage market, their cumulative exposure to the Canadian housing market is expected to be staggering. But savvy investors pay close attention to whether this huge piece gets bigger or smaller.
The new rules of "stress test" mortgages put in place early this year, designed to make it more difficult to obtain a mortgage, seem to have the desired effect. Scotiabank claims that its residential mortgage portfolio grew by only 0.4% in the quarter. That's only a fraction of what it was during the sparkling years of 2016 and 2017, and the bank said it would expect its loan portfolio to be nil. increases only by around 1% next year as well.
Although the numbers are slightly higher at RBC, they are moving in the same direction, with its residential mortgage portfolio increasing only 1.4% in the quarter. The bank still has residential mortgages worth more than $ 265 billion, but like Scotia, "growth is slowing down," said Mario Mendonca, an badyst at TD Bank.
After years of growth, Scotiabank started to see much less growth in the number of mortgage loans issued each quarter. (Joan Dymianiw / CBC)
Even if the golden mortgage does not lay as many eggs, the Big Five can probably still count on higher mortgage rates so that existing customers can generate more profits. But if one of Canada's other big banks are paying less home loans, Canadian homeowners will want to keep a close eye on them.
Do they feel confident enough to increase dividends?
Dividend cuts are virtually unknown in Canadian banks because many investors buy and hold shares for years, just for the regular income they provide. The bank's management therefore tends to increase its quarterly allocations if it is confident that it can maintain the highest payments.
If recent history is an indication, we could expect increases in the near future. Since the beginning of the year 2016, none of the major banks followed by Mendonca has experienced more than two consecutive quarters without a modest increase in their dividend. (The only exception is TD, which prefers to increase its dividend at the beginning of a calendar year and keep it for the next four quarters, if that is true, expect an increase, but not until the next quarter.)
This quarter, Scotiabank and RBC both maintained their dividends, but we expected them to show a lot of respect because they increased them last time. If the two-quarter trend continues, BMO will announce an increase next week, since it has not increased in six months.
Overall, Mendonca said "we expect banks to continue to grow their dividends at a steady pace," averaging about 8 percent this year and the year after.
If this happens, it is a good sign for investors that banks will feel confident for the future, even as distant storm clouds start to boom in the market. Canadian housing and the oil sector.
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