Canadian Bank Q3 Results: Expenses are Rising

NA's profilts slowing, BMO revenue growth is slow, Scotiabank results are starting to improve, RBC reported decent results, TD results are messy.

Ruth Saldanha 31 August, 2023 | 2:22AM
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National Bank of Canada Earnings: Profits Slowing for Now. Expect Expense Growth To Recede in 2024

National Bank of Canada (NA) released its second-quarter earnings report on Wednesday, August 30. Here’s Morningstar’s take on what to think of National Bank of Canada's earnings and stock.

Key Morningstar Metrics for National Bank of Canada

What We Thought of National Bank of Canada’s Q3 Earnings

Narrow-moat National Bank of Canada (NA) reported OK fiscal third-quarter earnings. As we have been expecting, earnings growth is becoming harder to come by for the sector as pressure plays out for net interest income and balance sheet growth while provisioning has also increased as the current credit cycle develops. In the current quarter, adjusted preprovision operating income was essentially flat year over year, while an increase in provisioning led to a decline in earnings. The bank's adjusted expenses were up 7% year over year, and we expect this growth rate to moderate in 2024. Indeed, the bank's FTE count has been declining since the first quarter of 2023. We have seen similar patterns for some peers who arguably over-hired through 2022 and are now switching back to a more intense cost control focus as revenue growth becomes scarcer. This will be a key part of our thesis on the bank as 2024 soon develops.

We still like NBC's overall positioning among the Canadian banks, with a more conservative mortgage exposure, minimal U.S. exposure, the highest returns on equity among the group, and fewer moving parts or turnaround needs. We are maintaining our fair value of CAD 105 and shares remain roughly fairly valued.

While net interest income, or NII, outcomes have been quite volatile for the bank as the rate environment changes and as puts and takes between nontrading and trading related NII play out, the current quarter shows some signs of stability. NII was down less than 2% sequentially, and the move in trading fees was also more subdued than previous quarters. The bank's nontrading NII was able to increase in the quarter as the adjusted net interest margin improved, something not all peers have been able to pull off. The bank's ABA and Credigy segments helped drive some additional balance sheet growth, as the rest of the bank was generally growing at half the rate of these segments.


Bank of Montreal Earnings: Revenue Growth Still Slow, but Expense Picture Should Gradually Improve

The Bank of Montreal (BMO) released its second-quarter earnings report on Tuesday, August 29. Here’s Morningstar’s take on what to think of Bank of Montreal’s earnings and stock.

Key Morningstar Metrics for Bank of Montreal

What We Thought of Bank of Montreal’s Q3 Earnings

Narrow-moat-rated Bank of Montreal (BMO) reported OK fiscal third-quarter earnings. As expected, results remained quite messy with multiple one-time charges, and an impairment charge of $45 million is forecast for next quarter. Excluding the impact of Bank of the West, adjusted preprovision pretax income would have been down 4% year over year. As we have seen with peers, the environment in Canada remains more constructive than in the United States. The U.S. segment's net interest margin was down once again, while Canadian NIM and preprovision pretax income were both up sequentially. We do not expect the pressure in the U.S. to completely abate, although if the Federal Reserve refrains from further interest-rate hikes, the pressure should ease over the next quarter or two.

Management struck a positive tone on the call about realizing additional revenue synergies, although in our experience these types of synergies are notoriously difficult to pin down. The bank took some severance-related charges in the quarter, which it expects will lead to savings of roughly $250 million by early 2025. It also made some moves on its real estate footprint, which are expected to lead to savings of $400 million. Combined, this should be another roughly 3% savings on the current expense run rate. The bank expects to achieve positive operating leverage in 2024, which we were already expecting, even on an adjusted basis.

Because results are largely tracking our expectations, with the main difference being the one-time severance charges, we are maintaining our $136 fair value estimate. Results will remain a bit messy for now, but we expect the expense picture to improve throughout 2024 and into early 2025.

The credit environment continued to normalize in Canada and the U.S. as provisioning, allowances, and net write-offs all crept higher. Delinquencies were also on the rise for consumer installment loans and business loans. While we expect credit costs to keep increasing, we project the bank will be able to handle it.

Morningstar Analyst Eric Compton 

Bank of Nova Scotia Earnings: Results Starting To Improve

The Bank of Nova Scotia (BNS) released its second-quarter earnings report on Tuesday, August 29. Here’s Morningstar’s take on what to think of Scotiabank’s earnings and stock.

Key Morningstar Metrics for Bank of Nova Scotia

What We Thought of Bank of Nova Scotia’s Q3 Earnings

Narrow-moat-rated Bank of Nova Scotia (BNS) reported improving fiscal third-quarter results. Expenses were roughly flat sequentially, better than the previous trend of increases, and revenue managed to grow sequentially, driven by fees and net interest income. Not all Canadian banks have increased their NII in the current quarter, so we view this as a positive sign. With results coming in as we expected, we will maintain our $72 fair value estimate. We await an updated strategy refresh for the bank, which will likely result in additional repositioning charges and new operational targets, so the next chapter for Scotiabank is still in its early stages.

Revenue came in at $8.1 billion, up 2% sequentially as NII and fees increased. This was as we expected. Further, the increase in NII is not being driven by mortgage loan growth, as the bank has dialed back its exposure here—a trend we like, given the current rate and credit backdrop in Canada. Scotiabank has one of the more conservative amortization and loan/value profiles in its mortgage book. We think this will serve the bank well as credit is generally trending toward increased stress for the industry as the next credit cycle develops. Net write-offs, provisioning, and reserves were all up in the quarter. Delinquencies also rose in the international and domestic portfolios. While we expect credit costs to keep increasing, we project Scotiabank will be able to handle it.

The bank’s international exposure helped drive preprovision operating income growth in the quarter, although provisioning is increasing for the international segment as Chile and Colombia come under intensifying economic pressure.

We expect net interest margin compression to slow or stop in the next quarter or two and Scotiabank to be able to generate additional revenue growth. Meanwhile, the trajectory of expenses should become more clear after the bank gives a strategy update.

Morningstar Analyst Eric Compton 

Toronto-Dominion Earnings: Additional Net Interest Income Pressure and Regulatory Disclosures

The Toronto-Dominion Bank (TD) released its second-quarter earnings report on Thursday, August 24. Here’s Morningstar’s take on what to think of TD’s earnings and stock.

Key Morningstar Metrics for Toronto-Dominion Bank

What We Thought of Toronto-Dominion Bank’s Q3 Earnings

Wide-moat-rated Toronto Dominion (TD) reported adjusted earnings per share of $1.99, a 5% year-over-year decline and a sequential increase of 3%. Results continue to be a bit messy, with a number of adjusting items related to the canceled First Horizon acquisition still hitting the income statement. It also became a bit more clear that issues with the bank’s anti-money laundering/Bank Secrecy Act compliance likely played a role in regulators withholding approval of the acquisition. The bank cited that there are ongoing investigations involving the U.S. Department of Justice related to these issues, and the bank expects monetary and/or nonmonetary penalties to be imposed. It is difficult to know what exactly these penalties will be, but consent orders and fines are typical in such instances. The bank’s current estimate of reasonably possible losses related to all legal and regulatory matters, which could include additional matters not related to this specific investigation, ranges from $0 to $1.29 billion. While this type of fine would not be material, it is never ideal to fall under the regulator’s gaze in this way, and it can lead to other sources of value destruction.

The bank’s regulatory issues aside, financial results were also not impressive. Net interest income, or NII, remains under pressure, down 2% sequentially, and we do not expect the pressure to relent next quarter. The bank’s U.S. exposure is not helping here. Trading fees were solid, however, card fees, brokerage fees, and net insurance revenue are falling slightly behind our expectations. Expenses, on an adjusted basis, were up 4% sequentially. With NII remaining under some pressure, expenses rising, and Schwab-related earnings also declining, earnings growth is likely to be subdued for the time being. Overall, as we incorporate slightly lower NII expectations and lower fee expectations, we view this as a slight negative for our current fair value estimates of $94.

-Morningstar Analyst Eric Compton 

Royal Bank of Canada Earnings: Results Roughly as Expected, Although Expenses Keep Rising

The Royal Bank of Canada (RY) released its second-quarter earnings report on Thursday, August 24. Here’s Morningstar’s take on what to think of RBC’s earnings and stock.

Key Morningstar Metrics for Royal Bank of Canada

What We Thought of Royal Bank of Canada’s Q3 Earnings

Wide-moat-rated Royal Bank of Canada RY reported decent fiscal third-quarter results. Adjusted earnings per share came in at $2.84, representing growth of 11% year over year, although adjusted EPS has been stuck in the roughly $2.70-$3.00 range for several years now. Results generally fit within our overall expectations, as we have been looking for a slowdown in loan growth, an increase in credit costs, and some pressure on net interest income growth. As such, we do not expect to make material changes to our forecasts, and we are maintaining our $130 fair value estimate.

For the bank to meet some of its previous goals, it was going to need to see a turnaround in net interest income, and indeed NII was able to grow in the third quarter after declining in the previous two quarters. Net interest margin was down slightly, to 1.5% from 1.53%, but balance sheet growth more than made up for this. RBC maintains a positive sensitivity to higher rates, and we are hoping that some of this latent sensitivity begins to shine through a bit more in the coming quarters.

Provisioning for loan losses ticked up during the quarter, driven by some provisioning on performing balances and some provisioning on impaired balances. Provisioning in the commercial real estate book continues to increase, and impaired balances are also trending higher. We expect to see reserve builds across the industry for the rest of the year as credit strain increases. We still expect any future losses to be manageable.

Rising expenses has been a theme for RBC for the last several quarters, and expenses once again came in a bit above where we had hoped. Management focused its commentary on cost-control measures, with reductions in full-time equivalent employees expected in the short term. As we incorporate these slightly higher expense rates, we expect them to be offset by slightly better fee developments, as wealth-related fees are doing a bit better than we had forecast.

-Morningstar Analyst Eric Compton 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Montreal118.09 CAD1.04Rating
Bank of Nova Scotia64.15 CAD0.42Rating
Canadian Imperial Bank of Commerce66.99 CAD-0.39Rating
National Bank of Canada113.65 CAD0.56Rating
Royal Bank of Canada151.58 CAD0.81Rating
The Toronto-Dominion Bank77.37 CAD0.82Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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