The Canadian Investor - Are Canadian Banks Preparing for a Recession?

Episode Date: September 7, 2023

In this episode of the Canadian Investor Podcast, we discuss the most recent earnings from Canadian Banks and if things will be getting worse for them and the economy in quarters to come. We also talk about private equity and VC financing in Canada and finish the episode by talking about Nvidia. Symbols of stocks discussed: RY.TO, TD.TO, NA.TO, CM.TO, BNS.TO, BMO.TO, NVDA Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

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You're back. How was your time off? It was good. I was holding down the fort. Yeah, I mean, it was good. I was still doing some stuff for the podcast, as I'm sure you noticed. I was going to say, we were on a couple of business meetings. Yeah, exactly.

But aside from that, no, it was good. It was kind of bittersweet because our little girl started day started daycare today so yeah yeah daycare so a big uh quite emotional especially for mom but i think it'll get better it's a progressive integration all the stuff she'll bring back to the house just get ready oh yeah she's already started so it's all good oh that is too good. Well, I'm glad you're back. The show goes on regardless. Hope people are enjoying some of the interviews. Two men I respect very much in Chris Mayer and Barry Schwartz were on the podcast the last two episodes. If you haven't heard them, make sure you tune in. They're great interviews. All right, we got earnings and news roundup today as per usual because this is a

thursday episode what is your first topic here i'm this is i don't even know what this is um all i know is it looks juicy yeah so it made uh definitely the headlines so this one was actually uh tweeted yesterday by doug ford so he uh is basically said on Twitter that he sent a letter to the Bank of Canada. So to Tiff McLean asking to stop raising interest rate. And that actually followed Dave Ebbes. I think I'm probably butchering his name. But he's the premier of BC who sent a similar letter over to the Bank of Canada asking them to not do any more rate hikes because it's putting pressure on people and their mortgages. And it's also, you know, hurting businesses, which, you know, Dan and I were kind of texting back and forth.

I find that pretty, pretty funny, to be honest, because whatever gripe people might have with the Bank of Canada, the reality is they're meant to be independent from governments. You can debate that, whether that's a good or bad thing, or if they're really independent when they make their decisions. But I think it's funny because you have, on the one hand, and we try not to get political, obviously, but Doug Ford obviously is a conservative in Ontario and then the premier of BC is actually the NDP. So you have kind of opposite spectrum, which I find kind of interesting. And for me, I always take it a little bit of issue there because if you read the letter and I encourage people to read it, it definitely tries to score political points. So it's more, you know, you can make your own judgment on the actual

letter, but it's not really, I do question the intentions. That's what I'll say for these kind of letters. And at the end of the day, you really want the banks to be independent as possible. But I think it also shows that it's a very difficult job that the central banks have right now in Tiff McLean. And there are competing things and they only have a limited set of tools at their disposal. So they're, you know, I'll be honest, they're kind of between a rock and a hard place. Yeah, that should be like the job description. Yeah. For being the chair.

Like your office is literally like you literally sit between like a wall and a giant rock. And then they put your office chair right in the middle there just to anecdotally let you know that this is what you're in for. No, exactly. And I think it just reflects. I mean, I think there's a lot of people hurting for housing right now i know dan has been a bit advocate of that for several years now it's nothing new for him uh but i think it also shows that i think all level of governments uh private businesses as well they need to work together. And one thing that I'll talk about a bit later is that the housing starts are actually dropping, unfortunately, because it's not profitable for builders to build condo houses, whatever

it is. And people can say what they want, but at the end of the day, they do need some expectation of profit, right? They're not in, you know, they're not going to build something if they're not in you know they're not going to build something if they're sure they're going to lose money on it no they're not charities and if housing starts are decreasing i mean it's a it's a pretty simple math equation right here that we've gotten ourself into And a decline in housing starts is certainly not an indicator you want to see to get us out of the problem. Yeah. And any kind of new measure

too, I think it's important for people to remember, you know, people can blame governments all day long and that's fine. You know, everyone's entitled to their opinion, but any kind of measure will take most likely, you know, several quarters, if not several years to actually see the benefits from it. So I think people also have to make sure that they have realistic expectations. There might be some really good policies that come into effect in the next year or two. I don't know if there will be, but I'm just saying like that. And even if there are good policies, the results probably won't be seen for several years down the line just because it takes time. The last roughly half of the show, we'll go through Canadian bank earnings.

Oh, yeah. And I mean, neither of us have been particularly bullish on Canadian banks in the past, maybe five-ish years, which has probably been the right call given their performance. But the quarters that just came out, especially from a few of them, were particularly alarming. Oh, yeah. And we're going to get to that. But, you know, I'm usually pretty optimistic with these kinds of things,

and especially the Canadian banks, even though I've had no intention of owning any of them for a long time now. And this is why we're about to see it. And there's just so many things out of my expertise to be able to predict, and for anyone to predict, for that matter. All right, let's do an update on private markets and VC in Canada. A bit of a different segment for us today. We exclusively pretty much talk about private companies, both with folks on Canada, but across the globe. We probably talk

more about US businesses than not. would you call canada the uh what the silicon valley of the north not quite yeah that might be a bit of a stretch for sure that being said i'm going a little outside of the the topic here this is a really really good place to build tech companies. In my view, I am slightly biased, but there are a couple of really key things that Canadian entrepreneurs can do and have distinct advantages. One, you have lower salary and wages for high quality tech talent. Like you don't need to pay some ex Google engineer, $300,000 plus stock options to get them on board,

which is a distinct advantage. You have something called shred, which is amazing funding for tech companies. You have something called IRAP, which supports innovative projects here in Canada. So there's lots of like government kind of subsidies and funding. And then of course,

you can charge the whole world in US dollars and then run your business in Canadian dollars and literally build margin from that. That is a distinct advantage for sure. So all of those things come together to actually really compelling growth stories here in Canada. I hope that we have more. I hope many come out of this gray country because there is a lot of advantages to building companies here. So anyways, this is from the CVCA, which stands for the Canadian Venture Capital Association. Is it the association? Probably. Let's go with that.

Yeah, let's go with that. Let's go with that. So they did a report on the first half of the year, first half 2023. And so far, there's been $4 billion invested in venture capital into 335 deals. $2.8 billion was invested across 170 deals during the second quarter, marking the second largest Q2 on record, only surpassed by Q2 of 2021, which is probably globally the peak of VC investments just generally. I mean, this is the height of euphoria, especially with high growth tech. While the number of deals saw modest 3% increase, the average deal size reached 16.6 million CAD, which highlights investor confidence in supporting significant growth potential. So bit of a rebound a little bit from a pretty poor end of 2022 in VC.

So people are getting a little bit more confident investing in good companies, but it's clear with these check sizes that it's a little bit less speculative. There's lots of seed and lots of pre-seed investments still happening, but not in these just like ideas. There's less people raising on a PowerPoint. That was happening a lot. Now, founders that have had huge exits in the past and well-known, they have distribution, they have that track record. Those people can raise on PowerPoint slides still, but not the first time founder. I have a great idea. It's just a on ai investments so to the shock of absolutely nobody any thoughts here i mean i was gonna say uh the i think i do wonder if the ai investment or a by component there's a little bit of a hype there because i have read a few different things

from vcs that there's almost like two different types of deals right now. A lot of VCs kind of choose to overpay in some regards for AI type of businesses. And there's the rest. They can be in tech, but if they're not really focused on AI, I think there's more emphasis on profitability for those. Whereas AI, there's definitely more leeway. That's what I've read. I mean, you're definitely more connected. And I do wonder if people are still able to raise money while playing League of Legends.

But sorry, I was sitting on that one for a little bit. Yeah. Yeah. For those who don't know what we're talking about, it's very well known now that Sequoia Capital, one of the most well-known VC firms, gave Sam Bankman fraud and his crypto firm there an obscene amount of money. And apparently he pitched them and closed them while playing League of Legends, the very popular computer game, which is just summarizes the time that sign of those times extremely well it's crypto huge check sizes no due diligence and just whatever that was yeah and i think it was also the meme round right i think it was like 420 million round and 69 or something like that i know they did a meme round it's i mean some of this stuff coming out of that i mean there's going to be a juicy netflix special on it that's for sure it's like what are we doing here guys what are we doing here yeah absolutely absurd now

private equity i have here uh they cover this as well in less detail, given that it's mostly focused on VC, but 3.6 billion total invested. So relatively in line, I mean, 4 billion versus 3.6 billion in private equity across 316 deals. So very similar, based on that math, very similar deal sizes and very similar volume between private equity and venture capital. I'd be curious how they really figured this out because there's so much angel checks that we'll never get. In VC, there's so many angel checks that are never actually going to hit this number. So I'd be curious about their methodology. The average deal size declined by 22%, but clean tech saw a huge growth, 116%, reflecting a growing focus on climate issues from private equity. Look at the deal size by province. We have

more than, Quebec is the largest by deal size, by more than double. Ontario at 75 and Quebec at 184 deals in the first half of this year. So Quebec being a private equity giant here in the country. Yeah, I mean, it's interesting. It may be a bit led by the Caisse des Pots Placements Quebec, which is a big pension fund manager in Quebec. It could be that. I know I haven't been following Quebec politics as much as because I don't live there anymore. I grew up there, but I know reading a little bit here and there, they've been putting a lot of emphasis on clean tech, I think, especially them

amongst all the provinces. So it could be a result of that as well. Yeah, you got to think. I mean, it's a significant amount more in deal size. But yeah, this is just a very rough overview of private markets, VC and private equity here in Canada. We don't touch on it a whole lot, but maybe something we touch on more and more in the future, maybe even another podcast show about it. So some stuff in the works and behind the scenes that we're humming and hawing on new ideas for another extension of the podcast. We did the real estate one last year. We're thinking about doing another one this year. Yeah. Yeah, exactly. And I mean, for me, for private equity, I'm always kind of, when it comes, especially to large institutional investors like pension funds, I'm always a little,

comes, especially to large institutional investors like pension funds, I'm always a little, let's just say, confused on how they value the private equity. From what I've been reading and hearing is there's a big disconnect right now, especially when it comes to commercial real estate and private equity, where there's almost no deals being done and there's a really widespread in between what sellers are asking for and what buyers are willing to pay. So something to keep an eye on. I've been pretty vocal about that where maybe down the line, there might be some adjustments to Duro's private equity investment because I think they're very hard to value. And I think these large institutions tend to value them on the more generous side. Yeah, I think that that's a fair

characterization. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money.

Visit questrade.com for details. That is questrade.com. BlossomPaid.com. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store

and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking,

sharing their investment ideas and using the analytics tools. So go ahead, Blossom Social in the app store and I'll see you there. All right, let's get on to some macro and then into Canadian banks. Yeah, so I think it fits well here. So it's Canada GDP. The figures came out for Q2 and I think it's a good kind of setup for the bank earnings because obviously banks are very dependent on how the economy is doing as a whole.

So last week, Stats Canada released its GDP figures for June 2023 and Q2. And for June itself, it actually showed a decrease of 0.2%. This is a reversal from a positive from 0.2% in May. And both figures are annualized here. And for Q2, GDP was actually flat as a whole. So I think we can safely assume that it is negative in terms of GDP per capita. I tried to find the actual data, but they don't break it down for Stats Canada per capita. But from what I've read, a couple of different places, it could be negative 2% to 3% for Q2 alone. So GDP per capita just factors in the high levels of immigration, but immigration in general when we look at

capita, because it can be misleading if you let in a lot of people in the country. If GDP is going up, I mean, what would it be if you look at it at a person basis? And I think that's a much better indicator of how it's going. So it's not great. Housing investment continues to decline despite new government measures, like I just mentioned. Inventories are accumulating at a slower pace, so that is good. Businesses are adjusting here with the surplus that they had over order during the pandemic. Household spending is slowing, but saving rate was actually up. So the saving rate is interesting. I think different possibilities here. It could be people kind of tightening the

belt because they know, for example, they're renewing their mortgage or they're trying to set a bit more money aside in case something bad happens. So that's an interesting component here. More of a positive, I would say. Business investment was up 2.4% after a year of decline. However, non-financial corporate income dropped for a fourth consecutive quarter. However, non-financial corporate income dropped for a fourth consecutive quarter.

So what this means is businesses that are not financial businesses actually seen their earnings drop for a fourth consecutive quarter in the aggregate. So that's really interesting because when companies do that, there's different levers that they'll pull, but sometimes they'll actually increase prices to be able to get that margin up. But when that no longer works and margin starts decreasing, they'll try to cut costs. And one of the easiest ways to cut, maybe not easiest, but one of the most obvious ways to do it is reducing headcount. And Royal Bank, which we'll talk about, they actually reduced their headcount, and they're looking to reduce it a couple percentage point more. So I know they're not, they are a financial business, but I think you're starting to see that. And that's something to be on the lookout for because, I mean, it could impact some of the employee numbers that we

see in the upcoming quarters. And another set of good news is that employee compensation rose 2.2% in the quarter. So, I mean, it's some good and bad. Clearly, the headline number is not great. I don't want to, you know, to, you know, be too bearish here and, you know, get people to panic or anything like that. And I think it's important to take it with a kind of, you know, you take a look back, you take a step back and you kind of think of what the potential implications could be for you as an individual, but an investor as well. And it's just a good reminder to have that emergency fund available. So three to six months of your expenses, if anything bad happens, you at least have a little bit of cushion to rely on. If you're investing, just making sure that the companies in your portfolio,

they're in good financial position. If there is hardship and there's some headwinds that they'll be able to weather those and then come out stronger and be on the lookout for potential bargains because the market is notoriously short-sighted. So they may see companies that will be really impacted by a potential recession in the coming months and be down on it just to realize that a few years later, they're actually stronger than ever and you were able to buy them at a discount. This is why I strongly believe you cannot have extreme home country bias, like only owning businesses exposed to the Canadian economy, or only owning business exposed to the Indian economy, if you're in India,

for instance. I think that there's a huge risk because some of the problems here on a macro basis can be isolated to just one country. And I think that that could be possible here with Canada. Look, I mean, our economy and our consumer confidence has become so tied to housing. It's undeniable. It is absolutely undeniable. And look how fast rates have moved. Look at the people getting squeezed, look at people getting their trigger and bullish on Canada in the long term, and also okay to be pretty pessimistic in the short term. Because I think that's where I am. I think that's where I sit. But these things are nuanced. I just talked about how it's pretty awesome to build tech companies here.

But it's also an economy that's extremely tied with consumer confidence and housing. So, you know, do your own research, do your own thoughts here. But for the love of God, don't go full, full home country bias. I think that's a bad way to go. Yeah. And I think there are companies that will allow you to get a lot of exposure internationally that are, you know, listed in canada but i had the discussion on twitter and i'm sorry like i don't remember who it was with but they're saying oh you guys talk about home country bias but there's a lot of companies in canada that are international and one of the companies oh yeah for sure yeah and one of the companies this person mentioned

was td and i'm like okay that's fair but there's still an outsized reliance on Canada for TD. I mean, more than half of their profits or around half actually comes from their Canadian operations. So you're still massively concentrated to Canada when you compare, when you think the US economy is like 10 times bigger than Canada. So you're still outsized in terms of concentration in Canada. So you have to make sure, yes, companies that do have exposure, but some companies are still extremely reliant on

Canada. Yes, they may have international operations, but when 50% of your operation is Canadian, I mean, you're still very heavily weighted to Canada. Yeah. If we're talking about 50% you know operating profits or uh net income or even revenues like that is significant exposure uh let's not kid ourselves yeah no exactly so i just wanted to make that point i mean it also just goes to show make sure you know the businesses uh you know as business that does commerce internationally does it's they're not all the same yeah like don't hear what i'm not saying there are so many like canadian listed stocks that are actually just like international businesses yeah exactly there are tons and tons of examples of this like think

of kushtar think of waste connections uh has huge huge business in the US. Think of Constellation or, you know, the list goes on and on and on. Not to be confused with maybe Canadian Tire that has like, you know, 100% exposure. So, you know, these things are nuanced. Yeah, and there's also less choice, right? If you look at certain sector, you may have one or two that are international

or zero in some sectors. So you have to keep that in mind where if you look in the US you'll have at least more choice of the type of business if you're looking at exposure in a certain sector as do-it-yourself investors we want to keep our fees low that's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you

can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable

and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY, do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're

building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo-style education lessons that are completely free. You can search up Blossom Social in the App Store

and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there.

Now to go on to the bank earnings. So feel free to chime in, Brayden, because I have quite a bit of content here. I went down the rabbit hole of looking at these bank earnings. Probably took me like seven or eight hours just digging into stuff. And it was, I mean, it was pretty fun to look at. So for people who have been living on their rock and not really looking at the bank earnings, so the overarching theme here is that

it was not a great quarter for Canadian banks. There was no way around it. Lower profits and higher provisions for credit losses, That's a good way to sum it up. Before I continue, though, if you're investing in Canadian banks, I think you have to make sure you know the bank well. And if you've never if you own a bank and have never looked at the supplemental financial information, you should do that when you hear this podcast, basically, because that information is extremely important. It gives you some really good information on some important ratios

and important more detailed into segments and really some useful information. You may not fully understand all of them, but, you know, when I started learning about banks, I did not understand all of these either. I would see a ratio, I would see a certain metric, and I would look it up to see what it was. And then you kind of figure out which one's more important than the other. And then you can kind of zone in what makes a bit more sense. Now, like I said, I did a fun little graph. Took me maybe like an hour or so. So I just took the loan loss provision or credit losses.

So I'll use that, you know, interchangeably here. So provisions for credit losses from Q3 2021 up till this most recent quarter. And it's for those who are on patreon on join tci you'll see that it's definitely trending up so it's a little graphic i did nothing too fancy but you see that in q3 2021 up to q2 2022 for the most part it was quite low even some of the banks were releasing some of these provisions that they had taken during the pandemic. And as we started getting into Q3 of 2022 last year, there is a steady increase overall in those provision for credit losses.

And it hit some pretty high level with Bank of Nova Scotia having the highest one, followed by TD and CIBC. So they're all above $730 million for this quarter alone any thoughts on that before i continue brayden dude i love this like data you put together this is super helpful yeah i got that from the supplemental information no i know i just you put it all in one place for every bank yeah that's great yes i was just fine I mean the one thing I would say against these kind of metrics so these are just absolute numbers so it doesn't look at it as a percentage of the loan portfolio so you have to keep that in mind because clearly you know if you compare it to like a decade ago banks are bigger today they have bigger loan portfolios so you know 800 million 10 years ago is not the same as 800 million today so i

think that's just important but i just thought it was an interesting little graphic for people to still see the increase and how banks are actually putting some money aside for those provision for credit losses looks like a sine wave because they had to put a bunch of they had to put it's not pictured here on the graph but they had to put a bunch away in uh in 2020 and it was in the negative in 2021 when they put it back and then now it's increasing again so interesting yeah exactly and for those who want to see the graphic you can just look me up on twitter at fiat underscore iceberg i posted that maybe less than a week ago. So just look at my recent tweets and you'll be able to find it. Or go to join TCI.com,

watch the video and you just shared it on the beautiful screen. Exactly. Now, mortgages are becoming a real problem for some banks. And I have another chart. i did not pull this one together so it was posted by at finance uh lance or finance lot um so he posted the amount of banks that have amortizations longer than 35 years so people will say oh okay like why is that an issue or some people might say uh how is an amortization available for more than 35 years? Well, in most cases, mortgages can only be amortized up to 25 and sometimes 30 years. I'm not a mortgage expert, but that I know. And this means that these are variable fixed payment mortgages. And for a lot of these, only the interest is paid on the mortgage

and some not even the full interest amount, which essentially means that your mortgage is growing. It's not good. It's starting to be quite a problem. There's four banks that are in this situation. And I'll show again for the joint TCI members. So you'll be able to see the graphic here. So you have TD that has 23%, CIBC 25%, BMO 30%, and Royal Bank at 23% of their outstanding mortgages that have amortization longer than 35 years. So that's only possible when the banks have variable rates with fixed payments. So only these four banks,

is my understanding we're offering that product scotia and national bank were not so they had variable mortgages but the payments actually change as the interest rates went up so this is really an issue because these people that have these mortgages my first instinct here is that if they were able to increase their payments, they would have done it already. Okay, most of them, maybe some not, but most of the people, if they could increase their payments, they would have done it. So what happens here is this is okay right now. But when the term comes up, typically, right, most people take five year term, when the five year term comes up, they'll have to renew the mortgage, but get it back to

25 years, let's say, of amortization. So they're going to have a big, big jump in payments. And that can be a bit of a ticking time bomb, I would say, for these banks, because we can assume that a lot of these mortgage holders will simply not be able to afford those increased payments. So they're going to have to either decide to sell or look at some potential other options with the banks. But it's a pretty big problem. But the office of the superintendent of financial institution, OSFI in Canada, they are looking at that and potentially making sure that the banks will no longer do that in the

future and looking at the banks that do offer it to have higher capital requirements, which means more cash on the balance sheet in case something goes wrong with these loans. Wow, this is fascinating. And the scary part about these mortgages are actually growing, probably, most likely. Yeah, or at least not going down. Yeah. Yeah. So it's i mean we can we can only speculate but that's an educated guess yeah exactly so it's not great and something to definitely follow if you own one of these banks or you're thinking of starting a position and now

to get back to the actual earnings i'm not going to do all of them because it would take way too long so i decided to do royal bank which was the only bank with a decent earnings report. CIBC, which was, in my opinion, probably the worst. And then National Bank, which had a decent earnings report. Not great, but it's the smallest bank as well. So RBC, the first note to mention here is that the Competition Bureau of Canada approved RBC's takeover of HSBC Canada. I believe, like I said, RBC is the only bank who beat earnings, beat analyst estimates, which is, you know, it's pretty impressive compared to the other banks. Net income was up 8% to $3.9 billion versus last year.

Earnings per share was up 9% to $2.73. Provisions for credit losses was slightly up versus Q2, but almost, I would say it's almost flat. So it was $616 million, I believe $600 million the previous quarter. So pretty much in line with the previous quarter. And their loan loss ratio, which is that percentage compared to their full loan book, that went down one basis point to 0.29%. So kind of good news there for RBC. Net interest margin was down three basis point to 1.5%. But it's been pretty stable for them over the last two years. And their CT1 ratio, which is just kind of liquidity available

in case of something happening that's unforeseen, that was a 40 basis point, which is good to 14.1% compared to Q2 of this year. So overall, pretty good report from Royal Bank. Q2 of this year. So overall, pretty good report from Royal Bank. But where it gets, let's just say juicy or not great is definitely CIBC. So I've been pretty bearish on this one, especially since for some time, I would say, but this quarter kind of sealed it for me. Net income was down 15% versus Q2 and 14% year over year to $1.4 billion. Provision for credit losses rose to $736 million, up 68% versus Q2 and almost 3x from last year. And they were in part because of their impairments of their US office loan portfolio. So that was a big part of the big jump here.

Analysts were predicting around 500 million, so significantly higher than what analysts were predicting. Their loan loss ratio is currently at 35 basis point. That's up six basis point compared to the previous quarter and tripled that of last year during the same period. Now for extra context here, typically for CIBC, a kind of more normal one is probably, you know, 20 basis to 25 basis points, but it reached a 64 basis point in Q3 of 2009. So

yes, I went back to Q3 of 2009 because I was looking for the great financial crisis to see where it peaked and from what I could tell that's where it peaked so it's just for people to gauge it and they now have 55% of their loan portfolio in Canadian mortgages or home equity lines of credit and 30 billion worth of fixed mortgages will be renewing in the next year most likely jumping from around 3% in terms of their mortgage rate. So people renewing those fixed mortgages to 6% or higher. So it's going to be a pretty big shock. And hopefully these people have put some money aside and started getting prepared for that. And the net interest margin was down slightly. Something to keep an eye on because it is kind of showing a downward trend here for CIBC.

And one slight positive is that deposits were slightly flat versus Q2 and up 4% versus last year. So all in all, not great for CIBC. Any comments here before I go to National Bank? $30 billion worth of fixed rate mortgages will be renewing in the next month no sorry next year uh in the next year so that was a typo i i said okay i said it in that you know in the next like how do you know that no it is in there i believe their investor presentation yeah okay well it's gotta is a lot a lot's gonna be in the next month as well in the next two three months four months it's a lot's coming up uh no doubt wow this is um this is an

interesting investor presentation slide because most of them i like your choice of word yeah interesting yeah uh nothing more to add here nothing more yeah and for the joint tci listeners you'll see i pulled from their investor presentation um all handed to cibc they do a good job for the investor presentation to the slide deck um it's not you know a substitute for the supplemental information but this graphic that i have it they actually have it always it's their credited portfolio breakdown so it's worth 538 billion and like i said 55 of that is tied to canadian housing so um something to to keep in mind um now i'll finish up with national banks so national bank like i said not as bad as cibc but also not great i think

a bit below analyst expectations here they don't have any 35 plus year amortization products net income was up two percent to 835 million earnings per share was flat at 2.36 all segments were slightly up in terms of net income, except the financial market segment, which was down 27%. Provision for credit losses were up 31% to $111 million. And their loan loss portfolio is actually, loan loss ratio, I mean, is actually quite low. So it's only 20 basis points. For new listeners, I know haven't mentioned earlier so 20 basis point would be 0.20 so that's 20 basis point it was actually a four basis point versus q2 and doubled that of last year so it'll be something interesting to keep an eye on i don't know if they just have a more conservative lending practice as a whole so that's why they have a lower provision for credit losses

as a percentage but something to keep an eye on and one thing that could be a plus with national bank is they've kind of grown as a primarily quebec-based bank although they are growing outside of quebec so i think their exposure to housing in ont Ontario and BC, which tends to be the most highly priced and unaffordable in Canada, is definitely lesser than other banks. So that's something to keep in mind for a national bank. And obviously, not having these extended mortgage amortization is also a good thing. I want to move on to nvidia here lots of discussion here about canadian banks if that's okay oh go for it yeah yeah like okay too much too much info for me let's move on no it's it's not that just for the sake of time here um

now this is a bit older here since nvidiaIA posted their Q2 on August 23rd. There are a few things here to discuss with the hottest stock of the year. Firstly, this is a $1.2 trillion in market cap stock now, which is nothing short of exceptional. The stock is up 238% year-to-date and 260% on the trailing 12 months. percent year to date and 260 on the trailing 12 months this is how nuts public markets can be even with very liquid mega cap stocks um what's that whole like uh the market is very efficient thing simone what's that about from the fall of 2021 to the fall of 2022, NVIDIA stock lost 65% of its value. That was last year. Then it is four and a half X since. So if you're looking for examples of the manic Mr. Market, look no further. Now, first off, congrats. If you've owned this for a while, I know many of the listeners have

for years. They recognize the GPU and the data center thesis and Jensen having that dog in him. Excellent work. Feel free to give me one of your millions, much appreciated. Record revenues, Simon, of $13.5 billion for the quarter, which is up 101% from a year ago. So a clean double on the top line revenue. Now here's what makes this impressive is that 88% revenue growth from last quarter. From Q1 to Q2, the top line grew 88%. That's not year over year. That is quarter over quarter. So this is absolutely bonkers growth. The demand for GPUs required for AI is off the charts. They've basically announced partnerships with every major tech company that you can possibly

imagine. The whole industry is leaning on them for this hardware. So now here's what's becoming the entire story. So if you look here on Stratosphere, if you're on that pro subscription, you check out the KPIs and the segments data, it makes your life a whole lot easier because we track them one by one. Now, gaming, professional, let me see here, gaming, professional services, auto, OEM and other was a mixed bag of like up 20% or down 20% on their segments. So you look across their business and you're like, it's a bit of a mixed bag. I mean, it makes sense.

You have cyclical demand for chips. You have declining growth from OEM and other. You have the professional visualization down 23% year over year, up quarter of a quarter, but down year over year. Nice little rebound from gaming from mass, like multiple quarters of declining revenue. And guess what? It doesn't matter. The data center business is on fire. It grew 171% year over year from this time last year. And quarter over quarter, it grew from $4.2 billion to $10.3 billion for that segment. So more than doubled during the April ending quarter to the July ending quarter. So that is nothing short of exceptional.

Now, the question becomes, and for people who own the stock or thinking about owning the stock, is how sticky is this influx of demand? The word on the street has been, buy your GPUs or you won't get them. Now, this was either a beautiful marketing trick from Jensen and NVIDIA, because clearly they're fulfilling the demands. If there was really this much of a crunch to get the GPUs, you wouldn't see the actual revs go that high. Now, maybe they're collecting this ahead of time of delivering it, but then that becomes like a booking and not booked revenue. So there's been all kinds of questions around the accounting of this online. And I have a lot of

questions as well. I'm not saying that they're doing something shady like some people have been, but I really should dig into this. Or they are geniuses and just made everyone try to buy as many as they can before they run out. Now, if demand cools after everyone sprints to get these GPUs, and this segment shows some weaker growth with the data center business, where the stock is trading today, valuation-wise, you can get wrecked from here. If you don't see this segment continue to fire on all cylinders, if there is even just a stumble, you could have amazing numbers in a vacuum. but when this thing is trading at nosebleed multiples, just be careful because if there is any stumble in the thesis, if there is any pulled forward growth, we've seen what happens in the last two years and you have pulled forward growth and hard comps, the market punishes you.

And I'm not saying that I'm embarrassed on the stock or anything from here. Just be very aware of that, that you could be facing some mega drawdown if this segment, not even the business, if this segment stumbles at all. I'm bearish on this stock. No, I mean, look, I think it's a great company, but I think one argument can be made. Obviously, if demand goes down, like you said, but the other argument is that when you have something as profitable, you invite competition. Other competitors see this, and I can bet you that let's take an AMD or even companies companies like Apple that now are you know starting to get into the semiconductor game well they have been for quite a few years now I can see them looking at this and saying look why don't we throw some money at this and try to compete in this space I'm not saying they will necessarily be able to do that and i think probably short to medium term it probably

won't happen because it will probably take a little bit of time but nvidia has such a head start and they've been the pioneers in this specific type of gpu that works so well for these supercomputers that are acquired for for ai yeah but i think you know give it five to ten years and i think you're they're not gonna be the only game in town that's my my prediction is just because yes it does take time to my you know to your point and what i was saying but when you're that profitable you just give competitors an extra incentive to really get into that because they want a they want a piece of it that it's that simple and i think i don't i'm not into you know uh you know i know a decent amount about uh semiconductors but i don't know gpus all that well but i will say that one that i'm sure

will try to um catch up is amd amd is definitely the one that they should be making sure that you know they stay ahead of yeah and valuation on a go forward basis is actually contrary to what you might think fairly reasonable next trailing next 12 months you have an EV to EBITDA on forward EBITDA of 37. So that is not absurd for a company growing this fast. However, everything has to be perfect for that to be true, for that to be right. And so that's the risk you run. And maybe the company continues to execute and it just keeps getting you know more and more dominant over time and really solidifies their moat

uh that may is that very mel very well may happen for this business just be prepared for a a fat drawdown on the stock. That's my hot take. Yeah, do you know if their alder chips are manufactured in Taiwan? Most of them must be, huh? Yeah. So that's a risk right there. Like you don't know what's going to happen there, but it's a non-zero chance

that there's a military conflict in Taiwan. So I'm not saying I'm not trying to raise alarm bells, but that should be part of an investing thesis, because if something does happen, it'll make it much harder for Nvidia to make those chips. So, you know, that's just an example of things that could happen that maybe the market is not fully pricing in. Maybe, you know, it should be uh you know 30 in terms of valuation to price that risk in i'm just kind of throwing numbers out there but it just goes to show that there are different things that can happen and that's one of them especially with china slowing down and not to be alarmist

here but traditionally uh powers that you know are entering periods of instability, these tend to be the times in history where they can get aggressive. So I'm not saying, again, I'm not an expert in geopolitics or anything like that, but that is a risk. If you invest in NVIDIA and you intend on owning it for more than a year or two, that's a risk you should be aware of

now this has been an incredible business incredible management incredible execution they've had the vision for for this they've skated to where the puck has gone before it got there it's just gonna look a lot different in the future you hinted at increased competition and there's no way they can kind of utilize this absurd pricing power that they have right now as everyone sprints to get their hands on these things that is going to cool off like it it naturally will and that's okay it doesn't that's not a detriment to the business. But anticipate it, right? That's the whole point of me bringing this segment up, right? Is a lot of people own the stock.

A lot of people are very excited about the stock, rightfully so. A lot of people are very excited about the business, rightfully so. But just to kind of cool expectations, they get a little out of control when a stock like this is up, you know, four and a half X in just a few months, right? There has to be some sort of euphoria in the mix anytime that happens. So just be mindful of that. Thank you so much for listening to the podcast. We really appreciate everyone tuning in. If you want to see all the graphs that we've shown on the screen here on our monthly portfolio updates,

we just dropped it actually a few days ago, our monthly portfolio updates for the end of August. You can go to join tci.com to support the show. We really appreciate it. That is join tci.com. See you in a few days. Take care. Bye-bye.

The Canadian Investor Podcast should not be taken as investment or financial advice. Braden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.