All major Canadian banks came out with their first quarter numbers over the last week, probably the most anticipated results the street was looking for in years.
Overall it was good news and bank stocks saw a nice gain, let’s quickly review the results and compare against other banks around the world.
Q1 Results
All of the Big 5 reported profits, yes profits that is not a typo. It is not very common to hear “profit” and “bank” in the same sentence these days, but Canadian banks have managed to make a profit in the first quarter of 2009.
Royal Bank $1.05 billion EPS: $0.73
TD Bank $712 million EPS: $0.82
CIBC $147 million EPS: $0.29
BMO $225 million EPS: $1.09
Scotiabank $842 million EPS: $0.80
All banks kept their dividends at current levels.
Loan loss provisions were generally higher than expected, and future outlook was also negative. The bank CEO’s said that as the economy worsens much faster than anticipated, the profitability levels were probably not sustainable.
The increases in unemployment and reduction in hours will have a double impact on the banks. It will cause more delinquencies and reduce demand for loans, hence causing the banks loan losses and reducing their profits.
All banks showed very strong balance sheets with Tier 1 ratios well above 10%. Tier 1 ratio tests the safety of the banks, the minimum requirement is 7% all banks were well above that.
Canadian banks are quickly attracting a lot of attention globally; recently the World Economic Forum placed Canadian banks as top banks around the world.
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Why have Canadian banks been better?
There are several reasons for the banks being stronger than their international counterparts.
First of all the federal government has not allowed the banks to merge and become bigger, had they allowed bank mergers and become more involved internationally things would not look as good as it does today.
Second and probably biggest reason is leverage. Canadian banks have not been as leveraged as the US banks and not nearly close to European banks. They have been very careful in lending habits and have not over-leveraged themselves. Some European banks had been leveraged as high as 60-1.
Most Canadian banks (except CIBC) were not exposed to the US subprime mortgage either, even though these mortgage were very profitable.
Bottom line is that Canadian banks have not been as greedy as other banks around the world, they have been conservative in their lending policies and it all has paid off.
Canadian banks are one of the extremely few banks who have not needed any government bailouts and almost the only banks with profits in recent quarter.
The lesson
Following the crowd isn’t always the best choice, being conservative pays off in bad times.
Full Disclosure: Own BNS
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Article by Ray
Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.
Ray has written 271 articles.
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I really like what you said about Canadian banks being conservative. I think one thing all of us can take away from this mess is that being a little conservatism and risk averse doesn’t hurt when making financial decisions. As well, in my opinion majority of investors don’t understand the reality of risk and this makes it easier for FAs to build their portfolios and brush past the risk stuff. KYC is ever more important and it goes both ways. Investors should also do their homework and get to know their FAs and not be afraid to ask questions of them. I was once told not to invest with anyone who hasn’t suffered a substantial loss themselves as they couldn’t appreciate the gravity of explaining risk and ensuring their client’s are 100% on board. I am not blaming FAs for some of the losses that people have had to incur. I just feel very strongly that investors need to self-educate and make conscious decisions and FAs have the responsibility of educating their clients. As well all know people like Bernard Madoff won’t think twice before using others for their means.
I agree that investors need to try to educate themselves a little when it comes to their investments, as well FA’s have a responsibility of educating their clients. I have seen many FA’s just telling their clients what to invest in and thats all.
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