TOP STORY
📉 BMO Crashes 9% as Canadian Banks Report Mixed Earnings

😰 Canadian banks reported earnings this week, and let’s just say for some… it wasn’t a pretty picture.

BMO was hit the hardest, down ~9% so far this week, with TD and Scotia also dropping over 2% since Monday.

When I started writing this last night, I expected all the Canadian banks to be in the red, but after reporting earnings this morning, CIBC and RBC surprised us with both stocks jumping over 4% today, putting them both in the green despite losses earlier this week.

😬 The Headline: It’s Rough Out There

Let’s start by looking at the bigger picture: the banks have had a rough year.

From regulatory issues to higher-than-expected reserves, here are some of the key themes of this quarter’s earnings:

🚫 Increased Regulation

Earlier this month, TD crashed ~8% after a shocking discovery that TD was the primary bank used in a $653 million money laundering and drug trafficking operation.

Not only were the criminals depositing huge bags of cash across multiple branches, they were even bribing tellers with gift cards.

This not only had a HUGE impact on TD (who had to set aside $450 million to cover fines), it sent ripple effects across the industry as experts called for stricter regulatory oversight.

Any increase in regulation increases costs for the banks, cutting into their profits amid already challenging times (i.e. TD is investing an additional $500M in improvements to its anti-money-laundering program).

 💵 Climbing Reserves for Loan Losses

With high interest rates, consumers and businesses are struggling, increasing the likelihood of defaults on loans.

This means the banks have to put aside higher reserves for losses - that’s money they can’t lend out and earn interest on.

We already knew it was bad, but it was even worse than expected, with the banks setting aside up to 20% more provisions for credit losses than analysts predicted.

 🏦 All Eyes on the Central Bank to Cut Rates

The best strategy for the banks right now seems to be crossing their fingers and hoping the Bank of Canada cuts rates in June, and with cooling inflation and analysts bumping up the chances of a rate cut from 40% to 65%, this hope is not unwarranted.

A rate cut would not only help “stave off the housing problems,” reducing the risks of mortgage defaults but would also likely shift the markets from pessimism to optimism.

That said, there are many analysts who believe a rate cut is already well-priced into the bank stocks:

With the bigger picture in mind, let’s now take a quick look at some of the biggest headlines from earnings week:

💰 TD Actually Had Strong Earnings (Despite the Money Laundering)

Despite the scandal and fines from the money laundering issues, TD actually posted strong earnings with earnings per share of $2.04 per share, over 10% higher than expected.

This was boosted by the bank’s strong wealth management business, which increased net income 19% year over year.

Even so, the impact of the money-laundering scandal overshadowed most of the good news - and for good reason. It will not only lead to fines, but also dealt a significant reputational hit to one of Canada’s most trusted institutions (with some credit rating agencies even downgrading TD from stable to negative).

TD has also continually pointed to the US for its next phase of growth, and the AML scandal has dealt a huge blow to those expansion plans - with it now clear that its failed merger with First Horizons Bank was due to these regulatory issues.

📉 BMO Hit the Hardest, Stock Plummets ~9%

Despite TDs regulatory and anti-money laundering issues, it was actually the Bank of Montreal that was hit the hardest, with the stock falling a whopping 8% this week. This was driven by a few factors:

• ❌ Earnings per share was 6% under analyst estimates

• ❌ Provisions for credit losses were ~20% higher than expected

• ❌ Net Income in the US (which is a big growth market for BMO) plunged 26% from last year

📈 RBC and CIBC Jump ~4% Today

RBC and CIBC just posted earnings this morning, so we won’t go too deep into these two, but here are some quick highlights:

• RBC Beat Expectations with 6% higher-than-expected earnings, lower-than-expected provisions for credit losses, and a 31% increase in capital markets revenue

• CIBC Beat Expectations with growth in all 4 of it’s core business segments and a massive 70% profit growth from its U.S. operations.

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ANNOUNCEMENT
🤯 We’re Hosting a 600+ Person Investor Meet-up in Toronto!!

🥳 In case you missed my post on Blossom, we have a huge announcement - we just booked a 600+ person venue to host the most epic DIY investor meet-up in Canadian history…

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