Q3 bank results: Solid but Scotiabank disappoints

Ashley Redmond: I'm here with Dan to talk about the results from the Canadian banks this fiscal quarter. So, Dan thanks for joining me.

Dan Werner: Thanks for having me.

Redmond: And overall, how did the banks do this fiscal quarter?

Werner: Generally, they had a pretty good quarter compared to the second quarter. We saw a slower loan growth for most of the banks and tighter margins. Third quarter, they seemed to bounce back from that fairly well. For most of the banks, we saw good loan growth. We saw slightly expanding margins in their Canadian business. I think the biggest driver though for a lot of the banks was in the Canadian segment [where] they had a lower provision for credit losses, which helped drive some of the net income from that.

In terms of the other segment, wealth management, you saw rising assets under management which leads to increased fees – the wholesale segments did fairly well. So, all in all it was a good quarter for the Canadian banks.

Redmond: That's great. So, if we take a step back and we look at it as one big picture, what was the biggest single driver behind the performance? What do you think?

Werner: You know, I think it's primarily the lower – first of all, it's the growth in the Canadian segment, the loan growth that we see in the Canadian segment. That was a big driver in increasing the net interest income, but to go along with that, the lower provisions for credit losses in the Canadian segment with improved credit quality that the Canadian banks have continued to show. Those were the two biggest drivers, and with increased assets under management for wealth management that helped drive some income as well.

Redmond: Okay. So, I'm sure all the investors watching want to know what bank was the biggest surprise and which one was the biggest letdown?

Werner: For me, the biggest surprise was CIBC. For a company that hasn't grown loans very much over the last year they [have] had a very stable margin. They had increased income in their Canadian segment by about 7.5%, again primarily because of lower provisions for credit losses. The reason for that is that, their gross impaired loans have declined by about 17%, by far the most amongst the Canadian banks. So, they don't need the expenses much to cover those losses. They had again, very good strong – they had strong increased assets under management, which led to higher fee income. Their American Century Investment has done very well and there's good trading income in their wholesale segment. So, all in all, outside the lack of earning asset growth we were pretty pleased with how CIBC did.

Redmond: That's great, and what was the biggest letdown?

Werner: The biggest letdown, I'd have to point to Scotiabank outside of the ING Canada acquisition that they made and a $90 million one-time gain in international. Their results were only slightly better than they were [in the] previous quarter. And TD Bank, I won't call it a disappoint, but they preannounced a big insurance loss prior to the earnings release, but I would expect – both are very well managed companies and would probably have very good results going into the fourth quarter.

Redmond: One thing our Canadian banks are tied to, and most banks are tied to, mortgages, housing market, so what's your take on the Canadian housing market right now?

Werner: Right now, it seems fairly stable. It's still a concern. Housing prices are still very high relative to average income to average rents. The government has taken steps here to try and slow that down. They've had some success doing that, but you see the latest reports out of the Canadian Real Estate Association and sales activity is still up. Pricing is probably going to increase by the end of the year, although very modestly, and even in hot markets like Vancouver, where prices were coming down the last half of 2012, activity has picked up again and pricing has increased which is pulling up the national average, and at this point they're expecting about a 3.5% increase in pricing this year, but given the other metrics, given how housing compares to rents and income, it's still a concern.

Redmond: Yeah. We'll have to watch for it definitely. And now that we have Q3 under our belts, we are looking to Q4, any factors specifically that you'll be watching for in the next couple of months?

Werner: I'm still looking at – I still look at overall earning asset growth, particularly how much loans are growing. Especially since the residential section – residential loans have really driven the loan growth here lately – but I'm always looking at the problem, I'm looking for the gross impaired loans and where those are trending.

For most of the banks, they've kind of remained stable, a couple have been up, a couple have been down. So, I'd like to keep a close eye on that and see how that does, because it does impact the bottom line given if you have an impaired loan you can't pay interest on it and the banks may have to take higher provisions for credit losses as a result.

Redmond: Great, thanks so much, Dan. That was tons of great information.

Werner: Okay. Thank you.

Redmond: To get some more insight on stocks and all the Canadian banks go to the stock section of morningstar.ca.