Q1 bank results: Strong performance from all the big banks

Ashley Redmond: I'm Ashley Redmond for Morningstar.ca, and I'm here with Dan Werner, equity analyst, to discuss our quarterly update for the banks.

Dan, thanks so much for joining me.

Dan Werner: Thanks for having me, Ashley.

Redmond: How did the banks do this fiscal quarter?

Werner: The first fiscal quarter for the Canadian banks is always a very good quarter. They all had very strong results. I think the really good thing that came out of it is the fee income from the wealth management and capital markets groups, [which] were particularly strong for all the banks. We saw stabilization of the margins and overall they had a very good quarter.

Having said that, there's a lot of noise in the quarter. There were some transactions that happened. You had National Bank acquiring [some] TD Waterhouse services from TD Bank. You had CIBC selling its Aeroplan credit card portfolio to TD, and you had BMO announcing a new acquisition for an asset manager in the UK.

So if you get through all the noise from that, overall they had a really good quarter.

Redmond: Okay. You talked a lot about various transactions closing, so let's take a look at M&A activity. What were the trends and what's your takeaway?

Werner: The trend primarily is that it's mostly on the fee-based businesses, the wealth management and the capital markets. Obviously the Canadian banks can't buy other Canadian banking assets unless they're being sold by someone, but it's primarily for fee-based businesses and that makes sense because the Canadian banks are generating a lot of capital. These are not capital-intensive businesses and they add a lot to fee revenue.

In terms of trends in the balance sheet, we saw slow loan growth overall, but much slower on the residential side -- and that was kind of made up for by higher loan growth on the commercial and business side. And we also saw that the margins have, for the most part, stabilized overall going forward. So, we aren't seeing the margin declines that we've seen over the last year and a half to two [years]. They seem to have stabilized and increased in some cases.

Redmond: Okay, so far so good. Now looking forward, what do you expect from the banks for the rest of the year?

Werner: I expect the margins to remain stable. In terms of the balance sheet growth, I think we're still going to see fairly slow loan growth and I see pretty good wealth management and capital markets fee revenue, because the markets have done very well as assets under management increase, the fees get a percentage of that higher amount that they manage. And the capital market activities have been really good in terms of underwriting activity, in terms of trading revenues which are really strong for all the banks this last quarter. And we're seeing the benefits in that area from a stronger economy in both Canada and the U.S.

Redmond: Now on to a popular topic that we just can't seem to shake on Morningstar.ca, the Canadian housing market. So I want to know your take on it, but I also want to point out that last week, the Conference Board of Canada came out with a report and I'm not sure if you read this one yet, but it said that because [such a low portion of Canadian mortgages are in arrears] that it's unlikely that something similar to what happened in U.S. in the 2000’s with the housing bubble and crash would happen in Canada. So what's your take on that?

Werner: I guess my take is that there has been no catalyst yet for a housing bubble burst. Rates remain low. Housing remains still affordable for most Canadians in terms of making a payment on their average mortgage, but prices still remain high relative to net incomes. Debt levels are still high relative to disposable income. I guess that my take is that there still hasn't been a catalyst yet to slowdown housing, to burst the bubble, and as long as the Canadian consumer, the homeowner, can still afford mortgage payments, seeing a housing bubble burst is not likely.

Having said that, I mean we're kind of keeping an eye on the overall Canadian economy. We're looking at GDP growth. We're looking at unemployment levels and the impact that a China slowdown may have on commodities in Canada and if that's going to have any kind of trickle-down effect. If we see the banks in Canada having to raise rates going forward, I think we may see some impact in terms of the arrears levels. But you're right at this point they remain very low, very manageable by the banks and so far so good in terms of the impact to the banks. But at this point, again, there is no catalyst to burst that bubble.

Redmond: Lots to watch in 2014 and with Q2, what factors will you be looking at?

Werner: We're going to be looking at the net interest margin levels. We expect those to be pretty stable. We're looking at the gross impaired loans for the banks. You mentioned before that they were very low, but they have been ticking up slightly [over] the last couple of quarters on the residential side. Again, nothing to get overly concerned about. They're still at very low levels, but it's something we're keeping our eye on and we're still looking for strong revenues on the fee income from both fee income business of wealth management and capital markets.

Redmond: Okay, great. Thanks so much, Dan.

Werner: All right. Thanks, Ashley.

Redmond: To check out Dan's analyst reports, go to Stocks page of Morningstar.ca.