The Canadian Investor - Betting on Canada is Working for These Canadian Banks

Episode Date: September 5, 2024

In this episode, we go over the recent development surrounding BCE as Moody's downgrades its credit rating to the brink of junk status. We explore what this means for shareholders, especially in light of the company's rising debt costs and questionable financial strategies.  We also dissect Lululemon's latest earnings, highlighting the contrast between their strong international performance and struggles in the U.S. market. Lastly, we analyze the latest earnings reports from Canada's big banks, with a particular focus on how differing strategies and regional exposures are driving their performances. Whether it's Royal Bank's steady rise or National Bank's standout quarter, we cover what you need to know as an investor.   Tickers of Stocks & ETF discussed: CM.TO, RY.TO, NA.TO, LULU, BCE.TO 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 Dan’s Twitter: @stocktrades_ca 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  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. 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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Pretty good. It's already, it's crazy. It's already September. Q3 is done. Like, where is the time going? I know we're going to have to start thinking about our bold predictions for 2025. As crazy as it sounds, I'm just like getting used to saying 2024. So yeah, I know, you know, and then we're switching the year over. Yeah. Yeah. One more quarter left on the year. That's crazy. Yeah. And before we get started, quick question for you. I did not ask you beforehand, so you're going to be put on the spot. What's the Bank of Canada going to do tomorrow? Cut, I think. Cut. Yeah, I would imagine so. And then, yeah, the Fed will follow, I would imagine. The big question is 50 basis points or 25 from the Fed. Like Bank of Canada should be 25.

Yeah, I think so. I mean, obviously, if they do 50 for the Bank of Canada, I think there's something they're seeing that is not good. I think we've talked about that before. But yeah, for the Fed, for the September 18 probability, so about two-thirds, 63% for one 25 basis points cut and then 37% for the 50 basis point cut. So it'll be interesting. I mean, those odds have kind of changed, kind of bitten all around a little bit.

So it'll be interesting where it goes. But by the time you listen to this podcast, you'll already know what the Bank of Canada did. So you'll see if we were uh completely wrong with our 25 basis points cut or not yeah i mean if it's any indication from like what we're seeing from the canadian banks uh clearly these cuts are are spurring a bit of lending because all the banks canadian segments are just ripping really it's it's uh it's pretty crazy especially the ones with high canadian exposure i mean they're definitely uh that's the best performers on the year for sure and a lot of

people wouldn't have predicted it at all as long as you close your eyes and don't look at the delinquency rates on some of their loans uh because we started and we'll be talking about the banks quite a bit today so probably the good, and I say good in air quotes just because they're the ones that reported probably the better results compared to last week where we talked about the ones, you know, so we had BMO, Scotiabank, and TD. What was it? TD, yeah, that did not have great results. So this week we'll be doing Royal, National Bank, and CIBC.

But we'll be starting off with some news from Bell Canada BCE sorry Bell Canada Enterprise I guess I keep forgetting I'm just used to Bell Canada so they were downgraded by Moody's so for those not aware Moody's is a rating agency they do credit ratings there's also SNP and Finch if remember correctly. I always forget about Finch. So there's the big three here. The rating, to give some context here, they were downgraded to the lowest rating for investment grade. So typically for ratings, you'll have investment grade and non-investment grade. And then there's a bunch of different echelons that you can have.

For our Join TCI viewers here, you'll see on the screens, you'll see the rating ladder for Moody's. So you have, I think, just looking at it quickly, 10 that are investment grades with AAA being the highest, and then another 10 from what I can see here, or 11 that are non-investment grade. So non-investment grade would be either subprime or junk level. And I've been very critical here about these rating agencies in the past just because they tend to be a bit behind the ball. Yeah, quite a bit behind, yeah. Quite a bit. I mean, obviously, they were behind the ball for the great financial crisis. More recently, we saw SVB, Silicon Valley Bank,

in early 2023, where they literally downgraded the debt to junk the day before they filed for... The day before there was a run on the bank and everything started unfolding for SVP, where it was obvious that was happening. So they tend to be a bit behind the ball. But the one thing that's important to note is if you get downgraded, it will likely increase the cost of your debt. So that's important to note because the lower you are on the echelon here,

the more people will be okay. Lenders will be, okay, that's fine. We'll lend to you, but we'll lend at a higher interest rate. So I think that's the part that people need to understand. Yeah. It's a very similar situation just from like a personal credit. People with higher credit often get more attractive lending rates. And I mean, the thing, they are quite behind because you have to think about, we've been talking probably about all the things they mentioned in the article for like nine months now yeah and they're finally downgrading them now but yeah it's they're a bit behind the ball but i mean it's still not really all that good of a situation yeah exactly and at least the good news here is they uh move the outlook from negative to stable

so that simply means that they do not think an imminent downgrade is likely although that can really change pretty quickly depending if there are material changes with the business or its ability to serve as the debt so take that with a grain of salt snp one of the other rating agencies has bc two notches above junk level although bc is still on negative outlooks since March. So don't be surprised if a downgrade also comes from S&P. And if you're a BC shareholder, I hope this doesn't come as a surprise. If it does, then I'll be very blunt here. You don't really understand the financials of the business you own. That's as simple as it can be, because like Dan said, I mean, we've been talking about this for quite some time.

I mean, BC has now $6.5 billion in debt to be refinanced between now and June 30, 2025. I mean, maybe a bit less than that because that was as of June 30, 2024. So they may have refinanced a little bit since, even though it looks like rates are coming down, like we discussed, BC's debt is still likely to be refinanced at a higher cost. Their interest expense run rate is on track to be $1.7 billion on an annualized basis. And that's a 48% increase since 2022 and well above 50% since 2021. And the last thing I will mention here is when you compare their interest expense through, so the EBITDA versus interest expense. So EBITDA is earnings before interest taxes,

depreciation and amortization. I think it's a fair way to look at it because there are some substantial depreciation and amortization charges for a company like BCE. So you wouldn't want to take that away from them because it's a non-cash expense. I mean, it's gone. So the higher, the better here. So it's just a number of times that they're essentially this profitability measure covers the interest expense. And it peaked at 9.2 times in 2016 and has steadily gone down since. And now the last 12 months, it's at 5.4. So you can see that, you know, that's a pretty dramatic change. And that's just the interest expense.

Yeah. And it's, I mean, I had some, I have some comments on the targets that they have, like internal targets. But I mean, it's mean, it's not good. It's fallen by what? You're getting down close to it's fallen by 50% since 2016. And the debt situation has gotten a lot worse. And just the overall growth perspective isn't really all that good for BC.

I mean, the one thing that I do find a bit comical was the company's targets. So prior to, I believe it was at the start of the year. So they wanted a net leverage ratio, which would be, I can't remember what the exact ratio is, EBITDA to debt, something like that. It might be EBITDA to net interest expenses, but they wanted it 2 to 2.5X. And then they kind of came out with a release that said, okay, we don't think we're going to be able to hit that target. So we're going to bump it up to 3X. And at that time, their net leverage ratio was 3.4X. And now it's jumped up to 3.71. So I mean they they're nowhere close to their old target so they just revive kind of move the goalposts revise the target up and then the one thing i'll just add

there for those who are not very familiar with that so it's a bit different than what i was talking about but it's basically a bit of the inverse he's not looking at the interest expense but lower is better here where the one I was comparing to higher is better. Yeah, exactly. And on that front, the adjusted EBITDA to net interest expenses, they used to have an internal target of, I believe it was 7.5. And that's the one that you want to see higher. So you want to see that EBITDA cover net interest expenses more. So in 2022, it was at 8.3X and now it's fallen to, it's under seven. And in terms of this, they had internal targets of 7.5X, but they just scrapped those targets altogether. So they just don't even give a target anymore. And they say

it's to simplify their targets. I kind of think it's because they just can't hit them. So they just move them, which is like, I can see it from like, say, an earnings or a revenue basis, like guidance gets shifts shifted all the time. But like the debt levels like this, like it's just like the company's issued $5 billion in debt alone this year. They're supposed to be deleveraging, but really they're just adding more debt and then kind of bumping their targets upwards, which I believe this is like. Obviously, there's a really easy lever the company could pull to improve its situation, which again, they won't do it. I don't think they'll do it, but they should do it. And that would be the cut of the dividend. do it i don't think they'll do it but they should do it and that would be the cut of the dividend but instead uh you know the targets just being revised upwards and scrapping of other you know

internal targets that they've kept for a very long time just isn't really a good sign uh in my eyes i mean this is what i'm showing here is the debt level so essentially yeah it's more than doubled in the last 10 years the total amount of debt that they have. And I think this is definitely a byproduct of a company not feeling the pinch too much because interest rates were so low for so long.

And I think they got used to that fact. And now it's catching up to them instead of trying to manage things a bit more conservatively, maybe pay down some debt, even though maybe at the time it didn't seem that

pressing. I mean, now they would have been in a much better spot if they had done that. Yeah. I mean, you had a lot of years of very low interest rates, cheap debt, so you could probably maintain those targets. But when the environment changes, instead of shifting the strategy to try to maintain those targets, they just kind of bumped the targets up, which is, it's a bit odd. I mean, like I said, over the year, they've added 13% in terms of their total debt. Whereas, you know, Rogers and Telus are in the mid single digits, low single digits. And Telus actually reported a quarter over quarter reduction in overall debt levels, not by very much, but it's a, you know, it's a reduction nonetheless. And then just in terms of the dividend, I mean, the company's trailing 12 month free cash flows are 2.89 billion. And the company owes about 3.6 billion in just common

share dividends over that timeframe. So, I mean, they got to, you know, find 760 some million. And I mean, a lot of investors I've had told me that they kind of have the idea that, you know, the dividend is covered, but they're financing the capital expenditures. They kind of have that mentality, like the company's financing the Capex, the dividend is covered, but ultimately, I mean, it's just, it's kind of money the company doesn't have. And I pulled this chart up for Joint TCI. There's a lot of people sometimes think, you know, that these telecoms go through, you know, Capex cycles and they go through long periods of, you know, not being able to afford the dividend and it kind of, you know, evens out over the long run. But I mean,

Bell hasn't been in this situation. We're going on two plus years of the company not being able to afford the dividend since the dot-com bubble. So if you look back in 2000 on the chart, you can see that free cash flow per share did not cover the dividend from the late 90s up until about 2004. And then from then, there's maybe six or seven, maybe eight quarters over the next, what is that, 20 years where the company couldn't cover the dividend. But other than that, free cash flow has covered it. And now we're sitting at the end of the chart. They haven't had a quarter where the free cash flow per share covers the dividend since it doesn't say the exact years here, but it looks to be 2021. And they haven't had

positive coverage since. So it's definitely not a typical situation yeah and i mean look at the end of the day i'll keep banging the drum they should cut the dividend i think it's short-term pain for a long-term gain for a company like bc maybe that will be my um bold prediction for 2025 is that bc will finally cut the dividend by the end of the year. I think it's a 50-50 chance personally that they do by the end of 2025. I think they will do it if they don't have a choice. If financing costs become so high because lenders are saying like, look, we have to charge you a higher interest rate because your debt levels are so high. I think they won't have a choice. a higher interest rate because your debt levels are so high. I think they won't have a choice.

That's, I mean, that's going to be my bold prediction. So a little preview for the end of the year, that's probably going to be one of my bold predictions. It is pretty bold because I don't think they'll do it. I mean, the other thing I checked too, in terms of institutional ownership, like it's declining. Like over the last year, I believe it was at 65% institutional ownership and now it's down to like the 50 year i believe it was at 65 institutional ownership and now it's down to like the 50 range so i mean institutions are selling this thing as well i mean it's still very heavily institutionally owned i mean this is a blue chip canadian stock but uh it's not i mean i wouldn't call it a blue chip but the perception is a yeah the perception is that it's not would not have those kinds. Yeah, and it probably wouldn't draw down

as much as it has, but yeah, it's getting pretty ugly. I'm really interested on the free cashflow guidance they issue for 2025. That'll be very interesting. Yeah, definitely. That'll be very interesting. Yeah, definitely. 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 talking, sharing their investment ideas and using the analytics tools. So go ahead, Blossom Social in the app store store and I'll see you there. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb

or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. not a great quarter for Lululemon. I'll go over that. Full disclosure, I do own this company. So I definitely, you know, it's been pretty painful for me over the last year or so. So Lululemon is

down quite a bit. Net revenues increased 7% while comparable store sales were almost flat. I mean, they were up 2%. China revenue was definitely a bright spot, increased 34%, while comparable sales were up 21%. More worrying, though, was definitely the Americas, which includes Canada and the U.S., so they saw comparable sales decline 3%. Comparable sales internationally were up 19%. Men's sales was definitely a bright spot here. It grew by 11%. It is a smaller part of the business still while woman sales grew 6%. Another bright spot is margins remain strong. So operating margins increase 80 basis points while

sorry gross margins increase 80 basis point while operating margin increase 100 test basis points. They also reduce their inventory pretty substantially during the quarter. The net income was up 15% to $393 million. Earnings per share increased 18%. That's because they repurchased about $583 million worth of share during the quarter. Free cash flow was down 11% to just shy of $300 million. But again, on a quarter to quarter basis basis free cash flow can vary a bit so i wouldn't worry too much about that on the so what really i think uh disappointed investors although the stock hasn't been down all that much yeah so i think it's probably people were expecting this yeah we're expecting kind of slowing sales. I mean, we've talked about it

without kind of repeating ourselves. A lot of retailers are saying that people are pulling back and kind of cutting back on spending. So I think broadly the market was, I'm assuming, kind of factoring that in, in the stock price. I mean, it's not performing well at all for probably now, like, yeah, better part of a year they reduced their guidance by three percent using the midpoint for 2024 as a whole compared to what they had been guiding up to the last quarter basically before q3 the reason for the reduction was macroeconomic uncertainty as well as issues with their product assortment specifically with their women's lines so that was one of the big issues

on the call they said that their international business remained strong which is clear with the numbers the us is definitely where the problem is it's their largest market and sales were flat u.s men's sales continue to grow but their women's business actually slowed a slow down they said that they've identified the main factor, which was the new products they offered were essentially there was less newness to their product assortment. That's the word they use, newness. And it was especially true for women's bottom. The new items they had performed well, but simply didn't have enough selection. And they said the product decisions had been taken earlier this year now i don't know if you remember but we talked about this is their chief product officer

resigned abruptly a couple weeks before uh the previous earnings you remember that yeah and we found it like a bit odd but on the call they made it sound like it was kind of planned or nothing like you know it wasn't because any issues although on the call they had it sound like it was kind of planned or nothing like you know it wasn't because any issues although on the call they had kind of alluded uh the previous earnings call that there were some things that were not kind of meeting their expectation in terms of the product assortment but now what they mentioned on this call i mean it's hard to not think that the resignation did not have anything to do. They must have seen what was happening. They must have seen trends with the data where things were not selling as well.

Essentially, they said that historically, they just had more new items available, especially for the women's products. They want to get back to that, and they believe they'll be able to do so by no later than early 2025. So spring of 2025, they believe they'll be able to have these new products. And that should help sales kind of, you know, pick back up. But they did mention that obviously the macroeconomic environment is also having an impact on their sales. Yeah, I mean mean these are really difficult businesses to operate especially like you know fashion just period we've seen it with

aritzia last year like there's been a huge deviance in uh lululemon and aritzia over the last year like aritzia is up close to 80 i think and lululemon's down what probably 35 for something yeah like yeah so like probably not quite half but down quite a bit yeah and they did the thing with aritzia back then is you know that they had a lot of high levels of inventory and there it was kind of the same talk you know like not enough new products i mean and then you know when older products don't sell well or you create new products that don't sell well you get a ton of inventory that obviously you've paid to make and then you got to mark it down which ultimately hits your margins pretty hard and uh yeah these

businesses are not easy to operate whatsoever especially you know a more expensive retailer like lululemon especially like you know you have the the macro environment and then you have you know just the difficulties of having to constantly be making new products that people are you know buying over and over again it's uh yeah they're they're tough businesses to operate i mean i i don't think lululemon's going anywhere anytime soon i would imagine when when the environment improves uh i think they'll be just fine but it just it kind of, like I've always kind of said for quite a while, like you want, you don't want to go crazy on, you know, retail stocks because they

can have massive drawdowns. Aritzia, Lululemon, Nike, Canada Goose. It's, they're very hard businesses. Yeah. Yeah. It's very rough. It hasn't, I think all of those, maybe except Aritzia, but Aritzia had like a pretty bad year, I guess, before the recent run up in the past year or so. And then I'm sharing here the chart for Lululemon. So the price earnings ratio, which is, it's never this low. Like the 4 PE for Lululemon is under 20. Like that's a rarity.

I mean, in the past, if you were able to buy Lululemon in the 20s, high 20s, it tended to be a pretty good entry spot as a valuation. And now it's trading at around 18, 19. So clearly there are some uncertainties ahead. Obviously, you want them to ride the ship. They did say that their brand still resonates with women, especially in the US. So they still have a lot of brand power. But the fact that they were lacking products, they noticed that people were still searching for their products, but they weren't closing the sales. That's what they actually said on the call. So take that as you wish. But I mean, for those that were interested in this name, it may be worth a look because whether you're looking at it on a price to earnings or price to free cashflow or whichever other valuation metric, it does look pretty cheap right now, as long as you believe that

growth will kind of pick up going forward. I mean, the international market is doing quite well. So if they can just pick up and have decent growth in the US, it should be fine. Canada was still doing quite well. I think it was in the high mid single digits. So something to keep in mind, but the valuation is definitely on the low end here. Yeah. And I would imagine where your more established market is. I mean, when times get like this, it's a more well-known brand. It's probably going to realize a larger slowdown. Whereas in the international markets where it's kind of still a new thing, it can probably continue to grow through all of this. But I don't know. As I said, I don't think Lulu's going anywhere anytime soon. No, exactly. But now I think enough about the teaser before the

banks. So do you want to get started with the biggest of them all? So Royal Bank. Yeah. So Royal Bank has put up some very solid quarters over the last two quarters, six months or so. It's been one of the better performing Canadian banks, and it's kind of starting to show its brand strength here in Canada. Revenue of $14.6 billion. That topped expectations by around $400 million and earnings per share of $3.26 came in 30 cents ahead of estimates. And we're seeing much the same out of Royal as we are all the other Canadian banks. And that's just kind of like their Canadian arms are performing exceptionally well. Although Royal is the most diversified from like a geographical basis,

like it's got exposure to 40 plus countries, it does have some of the heaviest exposure to the Canadian economy out of all the banks, which is, it's just crazy how it's a tailwind right now, because you wouldn't really think that, like you would have thought it would have been softer here, but it's just, it's going crazy. They've grown book value by 11% year over year, return on equity came in at 16.4%. C ct1 is at 13 which is well ahead of the regulatory minimum and they reported deposit growth of 22 year over year and loan growth of 17 year over year however a lot of this growth is coming through the hsbc hsbc acquisition so if we

isolate that out it's grown loans and deposits by mid single digits and low double digits respectively. But a lot of the banks, I believe Scotia reported a decline in loan volume and a very small amount of deposit volume. I think it was like two or 3%. So I mean, there's definitely separating numbers between Royal Bank and a lot of the Canadian banks that are struggling as of late. 12% increase in mortgages, 5% in HELOCs, 13% in credit cards. Again, though, if we isolate out HSBC, it's all around the mid single digits. But the one thing that's really standing out for the company right now is its overall volumes in the business segment. So there's 14% year over year growth, which is the fastest out of any segment by a large margin. And this is also X HSBC. So when you factor in HSBC,

it sits at 41%. So I mean, this makes up a smaller portion of revenue than personal lending, but it's still a pretty big tailwind. And the one thing is, and probably why they beat earnings expectations so much is their provisions for credit losses. So they came in at 607 million. So on a quarter over quarter basis, this is a $145 million reduction in provisions, which is certainly a strong sign. And they came in below expectations. But I mean, there is a reduction in provisions. It's certainly a positive, but the Canadian consumer isn't really out of the woods yet. The overall reduction in provisions primarily came from a decrease in wealth management and capital markets.

So capital markets, or sorry, wealth management reported a 30% decline and capital markets a 56% decline quarter over quarter in provisions, whereas its Canadian banking segment increased from 504 million to 536. But I mean, 6% boost in Canadian PCLs, I would still view that as a positive. We have to remember just even like a year ago, many of these banks were reporting, you know, 20 to 30% quarter over quarter growth in their Canadian segments. And in terms of, you know, payout ratios, which are, you know, there's certainly something people keep an eye on. And with banks, Royal remains pretty steady, 45% of earnings. Whereas, you know, you look at companies like TD and Scotiabank, they're, you know, especially

because of the anti-money laundering with TD, their payout ratio is like 80 plus percent. I think Scotiabank is in the 70% range. And I mean, in terms of banks, you never really want to see payout ratios this high. These banks typically, as soon as you start creeping above 60%, it's usually not all that good of a sign. I mean, TDs is probably short-lived just because once they get over that anti-money laundering, it will normalize. But Scotia has been up there for quite a while and they haven't really been able to raise their dividend as a result. I actually think they lost their aristocrat status. So they're no longer a dividend aristocrat. But yeah, I mean, the Royal's up 26%, 27% on the year. It's outperforming all the major indexes and this

is the largest company in the country. So it's outperforming all the major indexes and this is the largest company in the country so it's been a pretty impressive first three quarters yeah and i was uh for those watching on joint tcis i was uh showing the loan loss provisions by quarter so it's definitely yeah it's improved it's um so is the the hbc acquisition or hsbcBC, it's closed, right? It's finalized? Oh, yeah. Yeah. Yeah, okay.

Yeah, so now it's like... I couldn't remember. It's kind of the period now where you see a lot of adjusted results. So like the results look huge. I mean, 44% business loan growth, but I mean, it's really not that high. A lot of it is acquisition based, but yeah, it's closed. Okay. No, that was good.

a lot of it is acquisition based, but yeah, it's closed. Okay. No, that was good. 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 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb

or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. In terms of loans increasing, I don't know if you saw that and I'll be talking about it with Brayden on Monday. So Equifax came out with the kind of consumer credit in Canada. And I guess, you know, it makes a bit of sense why the banks are doing well because consumer debt level rose to $2.5 trillion in the second quarter.

And that's a 4.2% increase year over year. So those loans have to be coming from somewhere. And the somewhere is probably predominantly the big six banks. So I'm not surprised that the Canadian side of things is doing well. Whether that's good or not, I think it's a bit of alarming, personally, because Canadian households already have extremely high debt levels. So the fact that it's going up 4.2% and the credit cards balances, I think they're at the highest levels since 2007. balances. I think they're at the highest levels since 2007. So yes, the banks are seeing good revenue, but I mean, it may be a bit short-lived as we may be seeing a bit more kind of delinquent

loans, especially for credit cards. I would not be surprised if we kind of see, yes, maybe a Royal is doing pretty decent in this quarter, but don't be surprised a few quarter down the line, doing pretty decent in this quarter. But you know, don't be surprised a few quarter down the line, the PCLs go back up way back up again, right? So things can change quickly. So I think that's, you know, just food for thought for those who want to be investing in banks. Yeah, it's extremely hard to predict. And obviously, you know, an increase in loan volume doesn't necessarily signal any sort of economic health, it just be you know people are needing to finance more because cost of living has skyrocketed but i mean overall their canadian segment is doing like i would have figured you know people are going to be scaling back borrowing is going to slow but i

wonder if there's an element that you know rates have come down 50 basis points they're going to probably come down another 25 so maybe people who you know, were looking to buy a home that were holding out might be doing it now. They might be, you know, tapping into that HELOC now that they're saving 50 basis points. Like, who knows, really? But I think the fact that the Bank of Canada cut before the Fed, I think that is one of the main reasons why you're seeing Royal,ibc and national perform better than say bmotd or scotiabank because they have more canadian exposure and you know rates ultimately rates were cut first here so that'll be interesting to see if that continues to play out no that's exactly well that was a good overview one thing i'll finish I also did a little bit of calculation this morning. So I'll

talk about that towards the end of my segment about CIBC, which I'm about to start now. So they also released, obviously, if you were listening at the beginning, the three banks we're talking about are probably the ones that posted the best results. Revenues were up 13% year over year and 7% quarter over quarter-quarter to $6.6 billion. I love CIBC. They post both year-over-year and quarter-over-quarter. So it makes things a whole lot easier when you're trying to do an overview. So it would be nice if all the companies, but especially the banks, did that.

Net income was up 25% year-over-year and 3% quarter-over-quarter to $1.8 billion. Now, for Canadian banking as a whole, net income was up 3% quarter over quarter to $1.8 billion. Now for Canadian banking as a whole, net income was up 3% quarter over quarter. Net income was up 101% on an adjusted basis. It was in large part due to much lower provisions for credit losses. Capital markets was down 6% on an adjusted basis. On an adjusted basis, again, net income was up 28% and 10% respectively. I did not have my full notes. I believe this was most likely for the US business, but I'm not 100% sure here. The CT1 ratio, which is a measure of how well a bank can absorb losses, measure of how well a bank can absorb losses was at 13.3%. And that was up 20 basis point compared to the previous quarter and more than 110 basis point year over year. So they've made

a lot of progress there. I was kind of surprised to see how well they did. The net interest margin, something I always like to look at for bank was 1.39%. It's improved seven basis point in the past year. So it's steadily improved. That is definitely something you want to see for banks. You want their spread between what they loan out and what they collect in terms of loans. So you want to make sure that it's as high as possible because that's their bread and butter. Obviously, they also make money through fees, but the interest margin is quite important. They set aside $483 million for credit losses, which was the lowest amount since Q2 of 2023. So again, another reason I think why the market liked these results.

The allowance for loan losses, so basically the money now, the cumulative amount that they have on their balance sheet for bad loans is right around $4 billion. And it's been around that number for about a year now. Their allowance for loan losses, again, as essentially when you compare that on their balance sheet versus their gross loan books, so their loans, is currently at 0.71% and has been right around there for about a year. So people might be wondering, okay, so how do the other banks compare to that? Because 0.71%, it's kind of just a number like that. So let's put it into perspective here. So you have National Bank that has the lowest here. National

Bank has a 0.54% percentage on under balance sheets for provisions for loan losses compared to their gross loan books. Royal is at 0.59%. You have BMO at 0.63, CIBC at 0.71, TD at 0.83, and Scotia at 0.86. So you see that it's a bit across the board here. I did post that on Twitter and joint TCI viewers will be able to see it as well. So I did a little graphic, but it just puts in perspective, there's quite a wide range. So you have like kind of three banks grouped together on the low end. So you have BMO, Royal and National. And then BMO, I would say, I think it's also, you know, they tend to be a bit more business-focused, right? So that could make a bit of sense there. But then you have CIBC, TD, and Scotia, which are a bit more on the higher end.

I would say CIBC probably in the middle of the range here, but TD and Scotia really on the high end here. So it was just interesting to to compare all of those so any thoughts on that before i continue here well the one thing i'll say is like a lot of people might be confused as to why like bmo has done so bad over the last while despite you know having one of the lower ratios but the the acceleration of how fast it's gone up so this 0.63 uh i believe it's nearly doubled over the last year, whereas CIBC has stabilized a bit. So I mean, BMO is kind of... CIBC in 2023 was reporting a ton of provisions, which ultimately, they did not do very well. There was a lot of negativity around the bank. They've really

struggled. Whereas now they're kind of stabilizing reduction quarter over quarter provisions, whereas a company like BMO is accelerating, you know, like kind of continuing to grow and grow and grow. And this PCL ratio has like effectively doubled on a year over year basis, whereas CIBC has stayed kind of steady. So that might be why, you know, even though their numbers are higher, they're performing a lot better over the last while. I mean, year to date, they're up, I think they're the best bank or no, not quite. They're up 23% on the year. So, I mean, they're doing very well just because, you know, stabilization in terms of the provisions is a huge thing. Yeah. Yeah. And I think, and I know you'll talk about national bank, but I think one of the reasons are probably the lowest is because they don't have as much exposure to Ontario and BC, right? They have very little exposure, especially in terms of mortgages, right?

National? Yeah, National. Yeah, so if you look at the mortgage book of pretty much every single one of these banks outside of National, you're going to see huge Ontario and and bc whereas national is quebec is their biggest so i think like quebec is like 52 this is right off the top of my head i can't remember but it's it's over 50 and then ontario is like mid to high 20s whereas you know most of these banks will be a huge chunk towards ontario and bc yeah but yeah exactly that's probably going to change just because national bought uh canadian western yeah so that's going to change you think there's a risk for a royal for example and even a bmo because they still have you know in terms of percentage of

gross loans um and they still have a decent exposure to those provinces where consumers are the most stretched. I think it's a real risk that they could be having some pretty big PCLs the next year in some given quarters. They may kind of surprise the market just because the divergence is so big now between those at the bottom versus the ones that had a whole lot. big now between you know those at the bottom versus the ones that had a whole lot right like i i don't know i feel like there might be i know there's different quality of banks and different quality of loans but at some point i mean you have to wonder like maybe does rbc have to kind of increase that like a 10 basis points if that's the case then you'll you'll probably see one or two quarters that'll be some massive pcls yeah it's just really hard to predict like right now like you said like we have scotia td and cibc in the top three in terms of you know pcl ratios i would expect bmo to take cibc over i just don't

see like bmo is accelerated so much i don't exactly see like a all of a sudden slowdown and bmo does have a lot of exposure to commercial real estate in the US primarily, which makes up a big chunk of their gross impaired loans. But yeah, I mean, you're probably going to see in the end, these banks with high Canadian exposure having the lowest ratios. Now, whether that comes to fruition in the next year when all these mortgages are coming due and stuff, maybe they start to boost.'s so hard to predict yeah exactly it also depends on how fast rates come down like that's a big thing too yeah exactly and bond yields bond yields will have a big impact there i just think you know before people celebrate you know royal you know scotia

bank cibc i mean just just realize that yes things may be looking good at this quarter but you know, Royal, you know, Scotiabank, CIBC. I mean, just realize that, yes, things may be looking good at this quarter, but, you know, it could change quickly, right? Depending on the economic landscape, like at the end of the day, like the economy, you know, they're as dependent on the economy than pretty much any other type of business, if not more. Yeah. Like number one, type of business, if not more. Yeah. Like number one, really. I mean, I can't think of anything else. No, that's it. So what I'll finish with here is the net write-off. So I was kind of stiffing like going through their earnings presentation as well. I went through the supplemental information a little bit and then the earnings. And one thing that stood out was the net write-off for credit cards increased from 2.69% to 3.43% in the span of a year and is up 18 basis points quarter over quarter. That's a pretty significant increase. I don't know if it's extremely high on historical levels,

but that is definitely something you should be looking at if you own CIBC or own any of the banks. That's something I just wanted to highlight here. There's been a pretty sharp increase and the reporting net write-offs have increased essentially 0.25% that was last year for all of their loans to 0.36%. So that's a pretty big increase. That's like a 50% increase. I know it's 11 basis points pretty much. It's from a low base, so obviously it doesn't look too bad. But it's something I think you should keep in mind. And CIBC, they're just one of the banks with the most exposure to Canadian mortgages. So keep that in mind. I had a look. They do a great job in their investor

presentation. So I do encourage people to look at that. They always have their total loan book, and then they break it down. And it's always around 50 to 55%. If you combine mortgages and HELOC, that is their loan book. So they are very dependent on Canadian housing. Clearly, there is a big chunk of that that's insured, but there's also a big chunk of that that's uninsured as well. So it's something to keep in mind. CIBC has some of the most exposure in terms of, I think it has the most.

To Canadian real estate. Yeah, like residential real estate. Yeah, exactly. So keep that in mind. If we see a downturn in canadian housing you know cibc will definitely be impacted by that i think there's no doubt but uh that's about it anything else you want to add before uh we finish off with national bank nope that's it so yeah go for it i guess so so in my opinion national was the strongest

quarter out of all the major banks. I think, again, this is just due to the fact that it has a lot of exposure to the Canadian economy, as we mentioned, particularly Quebec. Eastern Canada, for the most part, not so much Western. But again, with Canadian Western, that's going to change moving forward. Revenue came in at $2.9 billion, which topped expectations and earnings per share $2.68 came in well ahead of what was estimated. And year over year, they've grown revenue by 17% and earnings by 23%. So this is the highest levels out of any major Canadian bank. Much like Royal, business and commercial lending is seeing the higher levels of growth. So they're up 14% year over year compared to just 4% for personal lending and overall deposits were up

6%. And the company's capital market segment saw some pretty extensive growth as well. So revenue was up 55% year over year and the company's efficiency ratio, which the company's efficiency ratio in the capital market segment, which efficiency ratio in a nutshell, just compares a bank's expenses on a non-interest basis to its overall revenue. It declined by nearly 8% to sit at 41%. So the lower the efficiency ratio, the better. The bank's CET1 came in at 13.5% and its return on equity came in at 18.4. So I mean, just like crazy good numbers from national. On the provision side of things, PCLs came in at 149 million, which is a 4% increase on a quarter over quarter basis. So I mean, again, stabilization in terms of PCLs, they're not reporting those large increases we saw a year ago and as you had mentioned the company has the lowest uh gross impaired loan ratio out of any

major bank here in canada and then again obviously the largest news i believe this was like mid june maybe late late june they they are spending five billion dollars to acquire canadian western i think we talked about this a few podcasts back just as an individual segment, but that was probably the biggest news like in terms inside the quarter. I mean, the stock fell $117 down to 106 on the news, but I mean, the market seems to have forgotten about this. It's gone from 106 to 124 in the last few months. And I mean, it should allow them to get more exposure outside of Quebec and Ontario, which has been one of the main downfalls of this bank, I guess. If you can find a downfall, they've done so well over the last while.

It should allow them to not only get exposure to Western Canada, but, you know, Canadian Western is, you know, a smaller bank, probably not as large of a product base. You expose, you know, Canadian Western customers to, you know, a bigger suite in terms of national could allow them to drive more revenue that way. And just overall for the big six banks for TCI subscribers, I added the just a chart of overall earnings revisions from the banks. So I've got their 2023 earnings per share, their 2024 projected earnings at the start of the year, and their 2024 projected earnings at the start of the year and their 2024 projected earnings now. So you've got three banks who have essentially received downgrades on a year over year basis. That would be TD Bank, BMO and Scotia. BMO is the big downgrade. So initially they had expected

earnings per share in the $11.34 range. They've now been downgraded to around $10.27. $11.34 range. They've now been downgraded to around $10.27. Whereas National, they were initially projected to be around $9.70 a share, and they've been revised upwards to about $10.35. And considering this bank earned $9.19 in 2023, that's some pretty big earnings growth from a big six bank, even though they're the smallest of the big six banks, they've been able to, uh, grow at a pretty crazy pace over the last while. And I mean, I think the Canadian Western, even though a lot of people thought they overpaid for it, myself included, I do think that's going to be, you know, an added tailwind for them to just expand on, you know, the Western side of the country. And, uh, yeah, they just continue to post crazy good quarters for, for uh for a long time now

yeah i mean it's uh it's really interesting chart because yeah it's basically last week we did divorce and then we do uh the best yeah so that's essentially what it is but at the same time i think it's just that's why we're talking earlier is you know what takes a big hit in terms of those profits is those provisions for credit losses. So, or provision for AML, so anti-money laundering for TD. So, you have to, I just want to mention that again, because sometimes people will fall in love with these kind of numbers because, oh, they're revised up, it's going well. You know, what if next year a Royal, it's looking at $13, $14, right? EPS for 2025. I mean, I think think you have especially when you have so much

uncertainty in the economy right now be careful doing a victory lap yeah or being too bullish about one single own like holding if you have the bang because things can change very quickly i mean wasn't it uh i think scotia right scotiaia, I would say they were revised down, but we can be like, let's be honest, they're pretty much flat, right? Yeah. So of the whole three, I would say yes. You have TD Bank. I would say it's not far from flat. Then the worst is probably BMO.

But Scotia, I mean, it's not very far from where it was expected to be but at the end of last year I mean Scotia was I think they started the big loan loss provisions right I think it was one of the first episodes we did together and they just had a massive I think it exceeded it was like 1.1 billion or something like that for a quarter they went through a period where they were reporting like way over estimates and i mean that's going to spook a lot of people and right now it's definitely spooking bmo because they're just like yeah they're just blowing through like again we talked about it it was 745 million and they ended up reporting like 900 some so i mean obviously that's definitely going to impact

forward estimates in terms of earnings because you know it's it's you never really know when it's going to end when you're going to see that stabilization which is why like you would have looked at 2023 you would have looked at CIBC and been like man I you I don't want to touch this thing and then all of a sudden you can tell they kind of overshot it best bank ever yeah and now they're like they're killing it right so it's so hard to predict in 2023 it looked like a complete disaster and then it it looks now like they kind of you know were overly cautious and now they're scaling it back in a big way and and now they're up you know they're having a pretty good year it's very hard to predict which is why if you're going to own these just own them for the long term i mean mean, it'll drive you crazy, especially during times like this, trying to, you know, navigate around this stuff. Yeah, well said. And I mean, even for

analysts, right? Like they're not inside the bank. They're not inside the risk management group for those businesses. Like if something happens in the quarter and the risk management group just said, look, you know, one part of our loans is really taking a turn for the worse. And I think probably another part for BMO that's probably hit them pretty badly. And that credit report from Equifax is that auto loans are performing as bad as they historically have. Like it's they're they're doing as badly as they've ever had, pretty much for the

non-bank lenders. They're at historical highs in terms of delinquencies. And for the banks, I think, just going off of memory, but I think the last time they were performing with this bat was in the mid-2010s. So keep that in mind because BMO, I know, had a pretty decent portfolio for auto loans. So it just goes to show that there could be one part of their business that sours pretty quickly within a quarter and the analysts have no idea, right? Like they may see headlines, they may look into the macro data, but they may also talk to some

people within the banks, but at the end of the day, you won't know until they come out with their earnings. Yeah, exactly. And I mean, in terms of BMO, I think they're actually like just outright getting rid of their auto loans. Yeah, they are. Yeah, they had announced it. Yeah. Go easy. So I don't think, well, I mean.

Yeah. Well, I think they must still have some on the books, right? They're just not originating. Yeah, exactly. Some new ones. But I just wanted to use that as an example that, you know, you can have a specific part of your business that really, you know, the rest could be performing well, but there's a

specific part that really kind of is struggling. And then they have to compensate for that part and then ends up impacting the results as a whole. Yep. Yeah. I mean, these estimates are prone to change pretty much on a quarter over quarter basis. I mean, anything can happen. Like a bank can, any of these banks can report a quarter where, you know, the provisions come in much higher because they've made some adjustments. And I think it's, yeah, like you said, the next year is going to be very important because there's a ton of renewals coming up. There's more pressure on Canadian consumers, even though rates are coming down, they're still way higher than we've normally seen. Yeah, myself included.

Let's go, you know, Tiff. I know. Lower those rates. Lower those rates pretty aggressively for like early, mid 2025, spring 2025. Lower them and then hopefully I'll have a tough decision between variable and fixed

and with the hopes that the bond markets cooperate as well yeah i'm january 2025 and okay so i'm me yeah 2025 so i have uh i have a little more time so i just gotta you know buy them get them down do it just do it yeah just on some fishery sense but no i think this was a good episode anything else you wanted to chat about uh before we uh let people go nope that's it no not even uh like we didn't chat about nvidia braden and i kind of talked about it a little bit any like any just quick impressions on nvidia why you think like the stock might be down despite beating expectations yeah i thought the results were

pretty good like i don't i don't understand why like they they topped expectations they their guidance came in quite well i mean i guess this would be a situation of just you know price to perfection add in the fact that september is typically a terrible time for the markets i think i think it's been five consecutive years that september's posted a loss like the the markets have lost in september uh 2022 was very ugly i think it was like nine and a half percent people take the summer off put an on autopilot and then sell sell sell in september yeah so i'll probably defer my uh deposits till the end of the month and then maybe it's okay i think they say like uh you know it's october so you just gotta power through you gotta power through september but uh no i

was we talked about a little bit and that's the same thing we said right at when you have these such high expectations and you know a lot of people are in the stock as well that you almost yeah like everything has to be perfect i mean i think they were pretty close to perfection but there was a couple things that i think just traders were nitpicking at. And it's probably pushing the stock down. I mean, today, everything seems to be down. So, you know, when everything's down, you know, chances are that Nvidia is down as well. Yeah.

Yeah. When the company is trading at like, what are they trading at? 29 times trailing sales. I mean, you're going to have to put up some crazy good results to uh yeah pretty good number to keep that uh to keep that valuation but yeah i mean i didn't think they had all that bad of a quarter it looked pretty good but just yeah i agree negative pricing but i mean yeah it is what it is okay it's what uh maybe probably 110 days until uh something like that until they report yeah exactly maybe no not

like no that would be too much i don't know why i was thinking that's probably like 80 80 90 days yeah 87 yeah 88 days okay okay sounds good so we'll be uh waiting and see what happens there but uh yeah thank you everyone for listening uh We do appreciate you taking the time to listen and we'll be seeing you next week. And if you want to see us on Twitter, I am at fiat underscore iceberg and Dan at stocktrades underscore CA. Yep, thanks for listening everybody. be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with

a financial professional before making any financial or investment decisions.