The Canadian Investor - Canadian Banks Set More Aside for Bad loans

Episode Date: August 29, 2024

In this episode of The Canadian Investor, we look at the latest Canadian CPI data and discuss the Fed's recent shift in focus from inflation to labor market concerns, shedding light on what this could mean for future policy. We also discuss Algonquin Power's decision to sell its renewable power business, and we dissect the lackluster earnings reports from BMO, TD, and Scotiabank.  Tickers of Stocks & ETF discussed: AQN.TO, BMO.TO, TD.TO, BNS.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

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger. Welcome back to the Canadian Investor Podcast. I'm here with Dan Kent. We are back for a fresh episode of our Thursday News and Earnings. Dan, before we get started, how's it going? Are you excited to, I guess, the kickoff of earnings season for Canadians because the banks are reporting?

gets the kickoff of earnings season for Canadians because the banks are reporting. Yeah, this is always an interesting time of the year. We have the CPI and then a bunch of Canadian banks started reporting. I think three of them will report in the back half of the week, and then we got three this week. It's definitely interesting. The banks are reporting earnings, lots of struggles thus far. Yeah, it'll be interesting. I mean, I did some, as you know, and some people might know, I'm not sure if I said on podcast, I just came back from a cottage we rented. So I did a little bit of work, stayed abreast of what was happening on the earnings front. So I think it'll be a fun episode to get started on. So let's just get started because we will try to keep this one not too long because you have, I think, what, a Craigslist person coming?

No, I'm just kidding. Yes, I have a meeting. A meeting. You have a meeting. Yeah, from Craigslist. An important meeting. Important meeting. So we'll try not to go over the timeframe too much. So like you mentioned,

Canadian CPI and the Fed had, well, Jerome Powell talked about what would be happening down the line at a recent meeting that he had. And I'll just go over both of it just to give people a bit of an overview. I know it's a bit older here by the time you hear it, but that's okay. So Canadian CPI, I won't go into too much details because we do have quite a bit to talk about today. The headline number was 2.5% year over year. Month over month though, it was 0.4%, which is not great. And it was a bit interesting because I did see while I was at the cottage, the headlines of the 2.5%, obviously trending the right direction, but 0.4 month over month, if you annualize, it's clearly way more than 2.5%. So I think that is something to keep in mind. And not many outlets were talking about that. So I found that pretty interesting. Energy prices remain in the low single digits. And I

think I'll say that again. I know I've repeated it, but that's definitely a risk for inflation picking back up if energy prices do start going up. And shelter costs went from 6.2% in June to 5.7% in July. So that was a big driver at lowering the CPI. So definitely, obviously, it's still going up, but kind of putting some downward pressure, even though it may still sound pretty high. The services, I'm just going on memory because I forgot to put in my notes, but I believe it was 4.4, 4.8% over a year. So services remains pretty sticky here. It'll be interesting to see what happens there. And in terms of the core CPI, the ones, the metrics that the Bank of Canada looked the closest at, those were for the

common, median, and trim, they were down to 2.2%, 2.4%, and 2.7% respectively. So definitely making some progress on that front. So anything you want to add before I go into some of the recent comments made by Mr. Powell himself? No, I mean, a few, a couple of the things that have been, I mean, the two stickiest things over the last year or so have been services and shelter, which I mean, it seems like shelter's starting to come down, still way too high, but that is probably the area of inflation that hits absolutely everybody. So to see that come down is a pretty bright spot. I just saw a, I can't find, I was looking up the tweet, I can't find it now, but somebody

posted kind of analyst projections of Canadian rates. And some of them were expecting like 2.75% policy rates by the end of 2025, which would be quite aggressive from where we're at now. But depending on how much it slows down and how long it keeps in this number, it's possible. The month over month, I mean, it's very so much. I mean, sometimes you'll get flat month over month i mean it's very so much i mean sometimes you'll get flat month over month and then the other times it'll come in way higher so it's really hard to like project that out that's a good point it's not as easy as to just annualize it i mean it it could if you if it keeps up i mean for you know three four months you could probably say oh you know this doesn't look too good but a one- a one-off month is not really too much to worry about.

No, and I totally agree with that. I mean, obviously, I think it's just good to note it. Like just a one-off, it's something you take with a grain of salt. Maybe it's something you look more at the kind of three-month, three to six-month rolling average where it puts a bit more context. Yeah, exactly. But obviously, yeah, and if you look at obviously what was said at Jackson Hole, so at Jerome Powell, there was a much anticipated speech because I think it'll

be the last time he speaks before the next Fed meeting in September. And I think the key quote to pull out from that is the time has come for the policy to adjust. And I watched a full presser and they were just kind of explaining how they got to this point. But it's clear that they're no longer concerned by inflation and now they're really turning their focus to the weakening labor market. Again, I don't have this in my notes. I'm going on memory, but it made the rounds quite a bit where the Fed did, not the Fed, but the BLS, I believe, did a major revision to the employment numbers not too long ago in the last couple of weeks. A big downwards revision for the employment numbers. So clearly showing that employment is not as strong as a lot of

people thought. And if you're into macro, you probably had an inkling that this was coming. A lot of people in this space were mentioning that it will likely be a pretty massive revision downwards. And that's what happened. And the Fed does have a dual mandate. So it's making sure that prices are stable, but also that the labor market is strong. So there's that dual mandate for the Fed. And I think just we've talked about this before, but just to reinforce it, I think it's important for

people to remember, you mentioned, can't remember which bank you said or who's predicting 2.5% by the end of 2025. But I think it's just interesting for people or just important to remember that when the central banks start cutting rates pretty aggressively, it means typically that things are not looking good. They're looking at lagging data, they're reactive. And as people from Join TCI can see, is that when you get the orange lines on the graphic here is essentially when you start seeing the rate cuts from the Fed and the blue is actually the S&P 500. And you can see that the stock market soon after the Fed starts cutting, the stock markets goes into a correction, if not worse. So I think that just goes to show that

typically when the Fed starts cutting or central banks start cutting, it's because they're being reactive and they're reacting to some pretty bad data coming in, which typically will be the start of a recession. Yeah, especially when you get the big, fast cuts. I mean, the COVID-19 situation in March, I guess, would be a little bit different. The markets went up, but that was also just because of the situation. They pretty much dropped policy rates to absolute rock bottoms.

But yeah, it's generally when they need to cut fast, it's typically because the economy is so bad and that's generally not good for the stock market. But I mean, all the data now supports rate cuts. So it's not surprising that they're going to do it. I mean, a lot of people kind of criticize the Bank of Canada for cutting early, but I mean, it kind of looks like the right decision now. And I would imagine that the Fed follows with probably half a point, who knows? Yeah, at this point, I mean, I was definitely wrong on that. And I'll totally admit it.

I didn't think the Fed would start cutting essentially when, like on the September meeting, because it is the last meeting that they are or the last chance to cut right before the 2024 election. So I didn't think they would start cutting there because clearly Trump will probably try to use that. At the same point, I mean, if you're Trump, the other argument you could be, it's like, oh, look at how bad the Democrats were. The Fed had to cut rates right before the election to try and help him out. I can just see him, you know, kind of twisting that a little bit. So it'll be interesting what happens. i was trying to pull up the cme fed watch tools so for the the upcoming meeting for september 18 2024 so it's a 36 percent chance 37 percent chance if we round up for a 50 basis point cut and 63.5

percent chance for a 25 basis point. So 25 basis probably more likely at this point, but we'll have to see. I mean, the markets have not done a very good job. Let's just be honest here about predicting what the Fed will do over the last year and a half or so. Yeah, exactly. I mean, the one thing that, I mean, when you get the odds that much in favor, I mean, effectively what 0% chance that they maintain, especially with the commentary about how he said that, you know, it's time for, you know, policy to change that pretty much signals almost a guarantee that they cut just depends on, you know, how much. Yeah. Yeah, exactly. 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. forward slash host. That is airbnb.ca forward slash host. So now we'll move on from the macro to a bit of name that I'm pretty sure a lot of people who listen to the podcast are actually pretty familiar with it. So Algonquin Power made the news because they're selling their renewable power business. So this was announced a few weeks ago. They announced they were selling their renewable business for $2.5 billion USD to LS Power, excluding their hydro business.

The transaction is expected to close in late 2024, early 2025, and the proceeds of the sale will be used to shore up their balance sheet and future growth. Their plan is to transform Algonquin into a pure play regulated utility and their renewable business. I just had a look a little bit at their number. It currently generates about 13% of the revenue. So it's not the majority of the business, but I think, you know, the name better than I do. And you were telling me like it was the only part of the business that was actually growing, right?

really sure what separates something like algonquin from fortis right now you know what i mean like there's clearly like fortis is clearly the superior regulated utility at least you know has been in the past and the fact that they pretty much have to sell this area of the business off to just shore up the balance sheet i mean it's it's just pretty much probably going back to paying down debt, debt that they kind of added over the years just to, you know, kind of try to fuel growth or having to sell that off just to pay down debt. And I mean, the main, the key reason, you know, that things went sour for Algonquin was just for the most part, their exposure to floating rate debt. for the most part, their exposure to floating rate debt. So I believe back when they first cut the dividend, they were, I believe 22 to 24% of their debt profile was exposed to floating rate debt. Where if you look at a renewal player like Brookfield Renewables, they sit at around 3% and Fortis is around, I believe this off the top of my head, but it's low single digits, like 5% tops. So I mean, that just got them into a whole slew of trouble. And it was just, it's been an ugly last while for this company. It kind of benefited from a 10 year stretch of

practically free money. And then when interest rates went up, it just got clobbered. Yeah. And the graphic here I'm showing is basically their interest expense. So you can see it was hovering around like 180 to 200 million. So from 2019 to 2021. And then you see when the rates started to go up in 2022. So then it's 278 million, 353 million 2023. And last 12 months, it was 390 million. So just goes to show that yes, interest expense has really ballooned and some pretty poor management decisions. I'll be honest over there. And the other thing I wanted to highlight too, is their net debt to EBITDA. The net debt essentially is just a debt when you subtract the cash they would have on the balance sheet and then earnings before interest,

taxes, depreciation, and amortization. Just to give an idea here, it's around like 9, 8.6. Lower the better because obviously, you know, it means your cover, in terms of the EBITDA, it's the amount of times it would be required to cover your debt. And if I'm looking at affordance, I think they're around like five or six. So it gives you a better idea here in terms of what kind of debt level they were looking at. And then on top of the floating rate that you mentioned. Yeah, and then they had quite a few years of share issues too. So it wasn't only debt, it was like equity as well, which for the most part, the company had a pretty good track

record of making accretive acquisitions. So it wasn't that big of an issue, but now it just got hammered. I remember a lot of people back when they, before they cut the dividend the first time were mentioning like FFO, their funds from operations and how it covered the dividend. And the one key thing is like FFO is not a, you know, gap metric pretty much. It can be, you know, companies can change how it's calculated. They can do whatever they want to make the numbers look better. And I mean, I think at the time before the dividend cut, they were 60%. Their dividend was around 60 or 70% FFO. And then, you know, it just comes out that they slashed the dividend and, you know, now they cut it again. Or did they completely eliminate it? They couldn't have eliminated it. No, so they cut it twice. Yeah. So that's what I was going to get

into. So they first cut it, they cut the dividend in 2023, they cut it by 40%. And then they cut it again by 55% with their earnings release. And if you held the stock before the first dividend cut, the dividend now is now down 73%. So that's a pretty massive cut here for a play that let's be honest, people that weren't in this name were definitely dividend seeking the income, looking at the income. So I think it's just a good reminder of understanding what you own. If you want to invest mainly in dividend stocks, have at it. I mean, I own a lot of dividend stocks myself. It's great to get paid. I totally understand that. But we've had some discussions on Twitter with other people where they kind of don't know

the business. They don't understand whether, you know, the dividend is sustainable or not. And then we'll see it here because I think, you know, for most people, most Canadians that had this name prior to the dividend cut, I think a lot of people thought it was just kind of a blue chip and they would never cut the dividend. But then if you even factor in the total returns, I mean, it's just atrocious. Over the last five years, it's down 44%. So that includes the dividend and the capital losses, I guess, with them. Minus 56% over the last three years. In the last year, down 22%. And then year to date, down 12%. So not a great holding to have. And I think it's important for people to remember dividends are not guaranteed.

And make sure that you know if you are in a company for like one of the primary reasons is that dividend, make sure it's sustainable. Because if not, you may end up having a pretty bad surprise here. So not too much more to add. Do you want to go to bank earnings before or anything else you want to add for Algonquin? No. I mean, I guess the one thing I would say is that a lot of people will associate the dividend cut with poor performance. But I mean, it's just been completely terrible operational performance. The reason it's down so much is not because it cut the dividend they needed to cut the dividend because they are not generating the earnings to even cover it which

is ultimately why the stock is down so much but yeah bmo so bmo is uh over the last while here it's struggled quite a bit you could argue it's probably been the worst performing Canadian bank over the last year or so. Earnings per share of $2.64. Not only missed analyst estimates, but we're also down 10% year over year. So most of the banks have managed to maintain at least steady earnings or maybe down mid-single digits. Or I believe, and again, this is off the top of my head, I believe RBC is even possibly growing earnings at a very small amount, but BMO double-digit earnings loss year over year, it's not exactly the best situation for them.

And one of the key issues I think on the quarter in terms of why the stock uh i believe it's down seven percent and i mean seven percent for a canadian bank that is a big move oh is it yeah on a on an intraday like a lot of people i mean if there's been a lot of volatility lately so people are probably immune to you know seven percent swings in price but but 7% for a Canadian bank is a huge move, especially post earnings. They typically don't move this much. And I believe it was because, well, I mean, operationally, they're not doing too well in the United States, but one of the big things was their provisions for credit losses came in at 906 million.

So this absolutely blew through expectations for 745 million. So this absolutely blew through expectations for 745 million. And one thing to keep in mind as well as these PCL expectations had been upgraded numerous times by analysts leading into the quarter. So I remember it was probably a month or two ago, most expectations were initially in the high 600 million range. So they kept getting upgraded, upgraded, upgraded. And even then they came in, well, what is that? 155 million higher. So that was quite a surprise. But the thing is, where you would think the bank is struggling, it's actually doing quite well. So its Canadian arm is doing very well. Revenue is up 7% year over year, 3% quarter over quarter, while net income is up 3% year over year and 5% quarter over quarter. And provisions for credit losses

were actually lower on a quarter over quarter basis. I believe they were, I can't remember the exact numbers, maybe 130 million, and that was 10 million lower than they reported last quarter. Loans are up 6% year over year. Deposits are up 11% year over year. And net interest margins remained relatively steady. But it's actually the company's U.S. arm where it is really struggling. So revenue is down 1% year over year, while earnings per share have fallen by 9%. And provisions in its U.S. segment have more than doubled year-over-year,

which year-over-year is really not a very good way to look at provisions. It's more sequentially, like quarter-over-quarter. But even quarter-over-quarter, they increase by about 30%, and in the States, loans are down 1% on a year-over-year basis, while deposits were up around 4%. This is the fourth consecutive quarter in which the company's U.S. segment has reported a decline in adjusted net income and net interest margins. And the really interesting thing from a PCL ratio is, so the company's impaired loan

PCL ratio one year ago today was 20 basis points. So it now sits at 50 basis points. Overall PCL ratio, which would contain performing and impaired loans was 30 basis points a year ago. And now it sits at 54 basis points. It's been steadily increasing every single quarter, you know, like six, seven basis points higher every single quarter until we've got to this, you know, the situation we're in we've got to this you know the situation we're in right now whereas you know a company like CIBC which hasn't reported yet they've they've kind of you know steadied that PC you know their overall PCLs and as a result they're like one of the best performing banks uh Canadian banks over the last year but I would be

you know there's still three banks to report but I would be shocked if this didn't come in at the highest PCL ratio out of all the banks. It's gross impaired loans ratio, which would pretty much represent its total impaired loans relative to his loan portfolio came in at 89 basis points. This is the highest ratio again, out of the banks that have reported on a sequential basis is up by 10 basis points. And I mean, the most alarming acceleration of PCLs is no doubt it's US segment, which is starting to really drag on the results. I mean, overall, it's just really not a good quarter from BMO. This is a company that I used to own, but I sold it, I believe it was three quarters ago. Just the acceleration of PCLs, the struggles of its US arm.

I mean, they're definitely, definitely concerning. And I mean, all banks report pre-tax, pre-provision revenue, but BMOs kind of started to move that closer to the top of the earnings report where they're starting to like mention pre-provision revenue, pre-provision earnings, which I mean, like provisions are provisions i mean they're they're set aside for a reason so you'll see all these companies report

the pppt but uh i mean bmo's kind of moved it front and center it's kind of the first comment in the report about how you know on a pre-provision basis they're not doing that bad but i mean that their provisions are i, they're the worst out of the big six banks. It's almost no question. And I think it's good for people to remember is typically you'll have two types of provisions, right? You'll have provisions on impaired loans. So loans that are extremely unlikely to be recovered because they are not performing, people have missed their payments and so on. And then you have provisions for performing loans. And the vast majority is typically, you know, the impaired loans. So it's,

you know, you have to keep in mind that extra money they're setting aside when the vast majority is impaired loans, there's a good chance they won't see the vast majority of that in the future. It's a bit different than in 2020, where the banks put a lot of money aside. I think I can't remember exactly, but I assume it was more on performing loans, but with the fear that the pandemic and people losing their jobs would result in mass, you know, 90 days plus delinquencies and so on, where right now it's more of a slower moving train. And one of the things I'm sharing here with Joint TCI's viewers is the kind of 90 day delinquency since Q3 2023 up until now.

So in the past year, and you can see that all the lines of business, I mean, the 90 day delinquency is gone for residential mortgages. And they're not big numbers, but it's gone 15 basis points to 24 in a year. Personal lending, 33 to 43 in a year. And this is for the Canadian portfolio. Credit card, 78 basis points to 1.08%. And then the, so I guess the total consumer is everything added up together. But

the trend I'm seeing here, and it's not surprising, but it's really an increase in those delinquencies. I mean, they may not all end up impaired, obviously, it's just 90 day plus, but typically, when you're in that situation, you're probably in a pretty tough spot if you've gone that far. Yeah, like you can get an impaired loan where somebody's had some form situation, you're probably in a pretty tough spot if you've gone that far. Yeah. Like you can get an impaired loan where somebody's had some form of, you know, mispayment and they somehow recover. But it's, I mean, it's generally not a very good situation. I was looking into the company's like gross impaired loans and a lot of them are coming from the services industry, which would, I don't know, what would that be like restaurants and kind of things like that, like businesses that are struggling. And the, I actually

don't have their earnings report up right now, but I did do, I did a YouTube video on BMO this morning and I looked at the business PCLs versus the consumer PCLs and the consumer is relatively steady there's very little increase but the business impaired loans has skyrocketed over the last three quarters so i think you'll find a chart in there if you're looking at it but it was like i think it was just two or three quarters ago they had 180 million and now it's shot up to like 550 so i mean it's definitely the uh i think it's a business side of things and not necessarily just the consumer side of things that are that are starting to struggle you at like uh services industry and u.s uh commercial real estate is where like a lot of their um impaired loans are

coming from and uh i mean the provisions in the u.s segment is one of the main things that's dragging on results right now. Yeah, yeah, exactly. I mean, and let's not forget that BMO, I think they have the most, if not the right up there in terms of those fixed payment variable mortgages in Canada. So those negative amortization and super long. So I don't know the exact number. I found it earlier. and super long. So I don't know the exact number. I found it earlier. But like I said, I came back from the cottage today and I was trying to didn't have much time to to review BMO's earnings. But I

did see that they've reduced it, but it's still a significant portion. And these are the people that will have the biggest payment shock when they renew. So I think it's it's just important to highlight that. But we've got a couple more banks to talk about. Dan, anything else on BMO? Or we'll just move on to, you know, the... I was going to use a certain term, but I won't use it. But the tire fire that is TD. No, that's it for BMO. 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. td.ca forward slash host. Okay, so I mean, TD, it's definitely, it could be better. Let's just say that. So the first thing that made headlines, of course, was that TD put aside an additional $2.6 billion in the first quarter for provisions for the US AML. So AML is anti-money laundering fines which you know governments do have regulations regarding that and the u.s has been investigating now td for quite some time was it it started when was it like 20 early 2023 when that acquisition fell through and that was one of the reasons yeah well that kind of like that fell through without like first horizon or whatever yeah that fell through without like knowing why at first

and it was like and then yeah it was kind of determined that like maybe it was because of that regional banking crisis and everything that they didn't want to do it but then it came out later on that they were being investigated and it probably wouldn't have been allowed to be put through but uh yeah i mean this is a i don't think anybody allowed to be put through. But yeah, I mean, this is a, I don't think anybody expected them to put aside this big of a chunk in a single quarter. I think like initially when the accusation first came out, I know most estimates were saying like 500 million to $1 billion in fines. And like you fast forward till now they're they're sitting at 3.5 billion dollars and it's far from over us i mean it's it could be over realistically they say that they want it to end at the end of the year or they they should get a resolution at the end of the year but there's no guarantee that other stuff isn't going to come out and there could be

more fines so i mean it's uh yeah and when you get in such big fines to 2.6 billion US dollars, like this means that they are probably like they're working with regulators. That's what's happening right now, right? Regulators are investigating. And TD probably has very good reasons to be setting that much money aside. Because they probably know like they've probably have communication with these regulators are telling them like look this is not good it's going to be a massive fine and they're already setting stuff aside but we've talked about it before and the biggest issue here with td is what if regulators say like okay TD, you messed up so badly. We really don't trust that you will be making changes

that are satisfying for us. So we'll actually make sure that you make those changes in the US and we'll prevent you from growing your loan book or your assets in the US. So you'll be capped at a certain level for a certain amount of years until you prove to us that you're able to do a proper AML program according to our standards. And then we'll let you, we'll reevaluate and let you grow. And that's what happened with Wells Fargo is with the whole thing about like opening, they were opening credit cards, bank accounts, like fake accounts without people ever knowing. So I think you have to be careful for those looking to invest with td saying thinking like okay it's all you know they're setting money aside they're saying they should have a resolution

by the end of the year the resolution even if they have it could be terrible for td to grow in the next uh short to medium yeah just because the resolution is coming at the end of the year doesn't mean it's going to be a positive resolution and on the on the fine front like a lot of people i've heard say well it's just a provision this is probably a little bit easier to ballpark than like uh like provisions on your loan book like if they're setting aside 2.6 billion dollars someone has probably told them at least to a certain degree that they're talking to regulators going to cost them that like yeah it's uh it's pretty safe to say that you know they're sitting at whatever 3.5

billion dollars i think they've set aside thus far it's pretty safe to say that's probably what it's going to cost them and it's probably going to be even more i mean we saw like the initial accusations and then you know six months later it came out that an employee was opening up accounts to illegally funnel money out of the country and that caused even more issues so like who knows what's not uncovered yet i'm sure there's a lot of going on behind the scenes that is not public i would guarantee there's a lot going on beside the scenes that's not public so yeah it's uh they're for sure cooperating at this point with the investigation like they are like so that's why when people say like i mean they

have good reasons to set money aside and i guess on that from so like you mentioned they had set aside already in the previous quarter an extra 450 million and they also the big news here as well was they sold 40.5 million shares of their stake in Schwab, which reduced their stake from 12.3% to 10.1%. It's in the same release as the AML update. I didn't have the chance to listen to the full call. So I'm assuming this is just essentially money that like a transaction they did to put money aside for that potential fine that will be coming. they did to put money aside for that potential fine that will be coming. And for those not aware, TD had acquired a stake in Schwab when Schwab acquired TD Ameritrade back in 2020.

I think the announcement of that transaction was 2019, but closed in 2020. And with all the attention around the AML investigation, it's like mainstream media kind of forgot to look at the provision provisions for credit losses for td i swear i had bnn bloomberg the first thing that came up and it's the first loss in decades for td because of the aml provisions that they set aside but td still set aside 1.072 billion in provision for credit losses for the quarter, which was essentially the same amount as the previous quarter. So it is interesting that they didn't really mention that. Clearly, the AML is really what's weighing on TD.

But again, the PCLs are not good. good um so i mean i don't own td shares but if there is a bank in my opinion that it's best to like kind of wait and see what happens and not try to you know bottom tick um it's probably td because between you know what most banks are struggling with with the uh provisions for credit losses and the aml there's a whole lot of uncertainty with TD right now. Yeah, they're pretty bad. Like you have a lot of banks, like say BMO, who's struggling with the provisions. TD is pretty much double whammy. They're not only struggling with the provisions, but they're also struggling with this AML situation. And so the AML, the fines, I believe, this is again off the top of my head, but I was going through the quarterly report and I think because of the fines, they took a 70 basis point hit to their CET1 ratio.

So they had to, I don't think they outright stated it, but I'm pretty sure they had to dump the Schwab shares to kind of bring that ratio back up because they did mention that next quarter, the sale of those schwab shares is going to increase the cet1 by 50 basis points 45 or 50 basis points okay yeah they had to read that would yeah they had to reduce their stake because of these fines that's pretty much the gist of it even even if they won't like outright state it it that's what it was from. Yeah. I mean, they put in the same release, so it's kind of hard to not add the two together. And I mean, yeah, the CT1 went down from 13.4 to 12.8. So that would make a whole lot of sense right there. And the cumulative amount that they

have in provisions for credit losses is now, so that's on the balance sheet. So people can just see that when you look at the balance sheet of a bank. So it's on the balance sheet. So people can just see that when you look at the balance sheet of a bank. So it's just all the money they set aside. It comes out on a quarterly basis from their income statement, but then it kind of shows up on the balance sheet. And it's at $7.8 billion up from $7.5 at the end of the previous quarter. And that takes into account what's set aside minus what's already been written off and recovered. And they now have 0.82% set aside on a total loan basis compared to their gross loans outstanding. And that compares to 0.78% in the last quarter,

last year for the same quarter. So it's been steadily going up since the end of 2021. It's not crazy. So 82 basis point, obviously, but it's something to keep an eye on because it has been tricking higher and something I would keep an eye on for all the banks if I, you know, own the shares of the banks. But I wanted to mention that they had a net loss of 14 cents per share compared to $1.53 net profit per share last year. Obviously, you know, the one of the big reasons is that provision for the AML investigation, their adjusted EPS was higher than the same quarter last year at $2.05. But again, I think the banks, I mean, they do a good job of telling you what they adjust for. But I think in this situation, you really have to take a look at both, not just the adjusted,

but also the actual numbers, because we've said it again. I mean, there could be some additional fines coming up. So I think it's way too early to say that, oh, they're fine now was a one time hit 2.6 billion. So I think you have to take that into account. The net interest margin for the quarter was 1.70%. Again, this has been trending down now slowly over the last two years. And in terms of segment, Canadian banking saw its net income increase 13%. So that is doing well. So it kind of goes what you were saying with BMO. It was flat for wealth management and it was massively down for U.S. banking segment because of those AML provisions.

So overall, I mean, TD really not a great quarter. Again, another one that's not a good quarter. I think it's more of a wait and see. Like I've said, I won't repeat myself, but yeah, I think it's personally, no matter how attractive they might look in terms of value i just think there's just so many uncertainties and things could still get much worse for td unfortunately yeah i mean again on the on the loss per share like for provisions you know you when you adjust them out you know there could be a recovery there but i would say this is like a guarantee almost a guaranteed cost that it is going to cost TD that much money, the $3.5 billion or whatever, and probably even more. But it seems like they're doing not bad, like operationally, but just the AML investigation is just, they're taking a big hit because of it.

Yeah. No, I think I agree with that. Now, let's move on to Bank of Nova Scotia. And if we have time, we'll do Metro earnings. But if not, we can keep that for another episode. So you want to go over Scotia Bank, how it looks. Yeah. So Scotia actually reported a fairly solid quarter, which is definitely on the rarer side. It's struggled for quite a bit for quite some time. They topped expectations, top end, bottom line. Revenue is up by 5% on a year over year basis. However, expenses are up 5%. So it effectively zeroed it out.

Earnings per share down 5% year over year. Return on equity 11.3%, which is down 80 basis points year over year. But the thing is, much like BMO, the company's Canadian banking arm is performing relatively well, like TD, BMO. I just don't, I can't understand that. I mean, you'd think that it would be struggling a lot more because there's a lot of headlines on the struggles of the Canadian consumer, all that type of stuff. But I mean, the Canadian arms of all these banks are doing quite well. Revenue up 9% year over year, while net income is up 6%. And much like BMO again, the company's Canadian provisions for credit losses came in at 435 million, and that's up just 2% from last quarter, which again is a bit of a sign

of a stabilization on that front. Net interest margins in the Canadian segment were up 16 basis points, which is actually like when you're talking net interest margins, that's a big boost. So they're at 2.52% right now. And loans were effectively flat on the quarter, but a few segments still saw pretty big growth. So business loans were up 7% and credit cards were up 16%. So this is just in their Canadian arm, but it was offset by the fact that personal loans grew just 1% and mortgages actually fell by 2%. Mortgages are big money lending and even personal loans are big money lending much more than credit cards. So I mean, that's 16% year over year growth in credit card loans is definitely something to keep an eye on. But yeah, deposits grew by 8% year over year. And as mentioned,

the loans are a bit flat. The company's wealth management arm put up double digit year over year growth in terms of revenue and earnings. They had mentioned that higher brokerage revenues and higher mutual fund fees fueled a lot of the growth. The company's international segment remains relatively steady as well. Revenue grew 6%. Net income is up 6%. Provisions for credit losses, $589 million, are up 14% year-over-year, but just 4% quarter over quarter. So again, a bit of normalization. Overall loans were down 2% in its international segment. Retail was up 4%, but business banking was down 7% and deposits were up 4%. So the total PCL ratio for Bank of Nova Scotia sits at 55 basis points.

This is among the highest from Canadian banks. However, the big difference here is like, Scotiabank kind of got to that 55 basis point ratio quite a while ago. And now it's seeing a bit, as I mentioned, a bit of stabilization. While in contrast, BMO, it's been accelerating and accelerating. And the company's gross impaired loan ratio now sits at 84 basis points. I believe, what did you mention? TD was 82 basis points. 82. And then Bank of Montreal was 88 basis points, I think. So, I mean, it's definitely within the

realm of normalization there. And they did announce prior to the quarter, I mean, it's definitely like within the realm of normalization there. And they did announce prior to the quarter, this happened, I can't remember when this was, probably a month ago. So they took a 14.9% position in US regional bank Keycorp. So they do expect the acquisition to be accretive to earnings per share within the first year of closing. And it also expects to boost the company's return on equity by 45 basis points. I believe Scotiabank actually went down on the news, but Key Corp, just because of the acquisition price, I think was up quite a bit. So that'll be interesting because this must be some sort of play for Bank of Nova Scotia to enter the US market a bit more aggressively versus what they've typically done, which is internationally.

But overall, not a good quarter, but not really a bad quarter from Scotiabank. We're seeing the same out of pretty much all the Canadian banks thus far. The Canadian segments are doing well, but they're not really picking up the slack of the US and international markets. And the one thing is, these are all Canadian banks, but we do not really picking up the slack of the US and international markets. And the one thing is, these are all Canadian banks, but we do have to remember that a large chunk of their revenue does come from outside of Canada. So they definitely need both ends of the business to be operating well in order to do well. And yeah, I mean, it wasn't too bad of a quarter. They've struggled for quite a while, but it's normalized a bit.

Yeah, I know. And I'm sharing here a slide from their investor presentation. So like you were saying, their provisions for credit losses. And I highlighted here, you can tell really that they started ramping up. I would say like Q4 of last year is really when they started ramping up those prevention for credit losses with 1.25 1.26 billion set aside 962 on q1 a billion in q2 and then again over a billion in q3 2024 so it is interesting though the canadian segment uh i i don't know i i feel like it's not hanging by much. I feel like it would not take much, whether it's, you know, more companies starting to lay off people. Not that we want that to happen. But, you know, there is there's a lot of stress, it feels like, at least in the Canadian market. And if you look at different retailers, right, we've talked about it. They're not doing all that well and people are pulling back, but maybe people are pulling back so they can actually pay those loans as well. Yeah. I mean, it was clear in BMOs, they're impaired loans. I mean, a huge chunk of them

was from the service industry, which would probably contain a ton of small to medium-sized businesses. And I mean, it seems, the Canadian arm results were pretty strong, but like you said, it seems like it wouldn't take much to turn that around quite quickly. But I mean, the one key thing is the provisions in the Canadian segment have somewhat stabilized. Whereas like when we were seeing it, you know, even what would it be probably two, three quarters ago, they were posting like huge quarter over quarter growth. And, you know, like Scotiabank and CIBC were two companies that were kind of, you know, early. And that's why we've seen like CIBC is normalized a bit. And it's, I'm pretty sure it's actually posting reductions, which has caused it,

you know, share price to, to go up quite a bit. So, I mean, it's all like, there's an element of timing here. I mean, BMO is clearly right now playing catch up where as a lot of the other banks are, are somewhat, you know, normal levels, no surprises. So, which is probably, you know, that's probably the biggest driver of share price right now is those provisions and whether or not, you know, if you come in, if you blow it out of the water, like, like BMO did, there's definitely going to be a lot of worries yeah and i think at least for these three banks i think the takeaway for me at least is provisions are either ramping up or staying at the same level so things are not yeah things are not really looking that much better

like let's be honest like they're not looking maybe as bad as maybe some people thought for like a scotia bank for example but overall i mean the pcls are in around the highest they've been in the last five years if you zero out uh kind of early the 2020 i guess 2020 which was a bit of a freak year and what happened with the pandemic and all the government programs in place kind of distorted things quite a bit. But if you remove that, I mean, they're really, they're up there, these provision for credit losses. Yes, it may not be as bad as it was like three quarters ago for Scotiabank, for example, but it's also not really getting better. It's just staying high. Yeah, exactly. And I mean, if you see, if you expect like some sort of provision recovery, like you saw in, you know, post pandemic where these, you know, these banks have like, they went way overboard and then they started recovering a lot. And then like banks went on an absolutely massive run.

That's probably not going to happen. That's not, I'm going to go and run that's probably not going to happen that's not i'm gonna go and say that's not happening no i think we're like a long ways from you know these banks kind of reversing this and and starting to report recoveries but one thing that would be a strong sign is a is a reduction and maybe not you know a flat line in pcls but uh yeah the one thing you don't want to do right now, and clearly when we see a 7% dip in BMO is report three quarters of consecutive huge increases.

Yeah. And I think if someone's, if their thesis in the banks is that what happened in 2021 will happen again with banks like releasing provisions from credit losses. If that's your thesis, you should not be investing in banks. That's like, that's my kind of hot take here. Just, I'm saying that like, I'm laughing a little bit and you are, but it's a completely different situation. We talked about it a little bit. We alluded to it. Yeah. In 2020, the banks

were seeing the world shut down. So clearly the risk management, they're like, okay, we have to take these massive PCLs because people are losing their jobs left, right and center. We don't know what the government will do. We have to be on the safe side. And then obviously there was huge amounts of stimulus. There was loans to businesses that was served for individuals so and i think there was also some remind like correct me if i'm wrong but i think there was also some programs where the banks would allow you to not pay for a few months for your mortgage and stuff yeah i think you could get six month relief and then they just tacked it on yeah exactly amortization i think so i mean that's not happening probably no this time around so this is a completely different situation. And we talked about at the beginning, it kind of ties into the Bank of Canada and the Fed cutting. Well, the Bank of Canada and the Fed are cutting pretty aggressively and it still remains to

be seen. Maybe they won't be cutting that aggressively. But if they are and the overnight rate is, let's say, around 3% or even lower, it means that we're probably going to see a lot of job losses. And if you're starting to see job losses or business struggling, who has those loans as assets on their balance sheet? I'm going to go and say most of the big Canadian banks. I think you have to really be careful here is because the macro,

what we're talking about it, and we don't talk about macro all the time, but I think it has a big impact when you look at banks because they're very dependent. I mean, if you can't service your loan, you can't service your loan if you lost your job, right? Yeah. It's extremely hard to predict even for the banks. So I mean, these numbers are yeah they're they're difficult to project out but i like i wouldn't expect any sort of i would like maybe we start to see a decline it's really hard to say it really depends you know economically how things go but uh i think we're a long ways from being out of uh the current mess i guess and. And as you mentioned, faster rates come down,

probably the worse it is for the Canadian economy, whereas if they kind of gradually go down, maybe, you know, a soft landing is achievable. Oh, you said a soft landing. Dan's into soft landing, can't be said it.

We'll clip that out. Yeah. Well, I think that's it for today, right? We got over the banks. We'll keep Metro for another time. Maybe we'll do Metro and kind of Loblaws and all the grocers when they report. I don't think they've already reported. Have they, the other ones?

Yeah, Loblaws reported earlier than Metro. I can't remember when they reported. So maybe we'll just uh, maybe we'll just do, uh, the, uh, grocers when things start dying down a little bit, even if it's a few weeks out, I think, uh, people are always interested, uh, at the grocers and, uh, you know, whether they love them or they hate them. I think people are interested at the grocers. So that was a fun episode. And I mean, I'm happy I found the energy because a couple hours of driving with a baby crying was, you know, drains you a little bit. But I think it was still a fun episode.

And we'll be back next week for another one. And, you know, by all means, if you haven't done so, make sure you give us a review on Apple Podcasts. Spotify takes a few minutes at most. And it really helps people discover. And if you like the podcast, you know, talk to someone, if you have a family or friend that's interested in that kind of podcast as well, really helps, you know, word them out, helps us grow. And you can follow me at Fiat underscore Iceberg on Twitter slash X and Dan at stocktrades underscore CA, right? Okay, I got it.

So let's just sign off before I mess up anything else. Thanks for listening, everybody. assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.