Big six bank profits soar

The big Canadian banks are indicators of the economy’s health. How did they fare in the second quarter?

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Second quarter earnings per share at the Big 6 Canadian banks soared 167 per cent.

The second-quarter earnings season for the big six Canadian banks has come and gone, and the results are all in.

These results are important, because they provide a clue on the outlook for the Canadian economy in coming months. And based on these results, the outlook is encouraging.

As it was, the consensus analyst forecast was for second-quarter earnings per share (EPS) at the Big Six to rise an average 134 per cent year over year. But the banks better did than that. Profit soared 167 per cent. As usual, individual results varied widely.

■ Bank of Montreal (TSX—BMO; NYSE—BMO) made $3.13 a share in adjusted earnings, up from $1.04 in last year’s second quarter. EPS came in above the consensus estimate of $2.77.

■ Bank of Nova Scotia (TSX—BNS; NYSE—BNS) exceeded analysts’ estimates by $0.14 a share, or 8.0 per cent. All the remaining banks exceeded their consensus estimate by higher percentages. Scotiabank earned $1.90 a share versus $1.04 the year before.

■ Canadian Imperial Bank of Commerce (TSX—CM; NYSE—CM) was expected to earn $3.01 a share. But the bank earned $3.59, compared with $0.94 last year.

■ National Bank of Canada (TSX—NA; USOTC—NTIOF) beat the average estimate by $0.25 a share. Adjusted EPS of $2.25 was 123-per-cent higher than the $1.01 it earned a year ago.

■ Royal Bank of Canada (TSX—RY; NYSE—RY)) earned $2.79 a share in the second quarter, 171-per-cent higher than the $1.03 it earned a year ago. Analysts had expected the bank to earn $2.49.

■ Toronto-Dominion Bank (TSX—TD; NYSE—TD) reported a 140-per-cent increase in EPS, which rose to $2.04 from $0.85. The consensus had called for $1.76.

All the banks, then, beat their consensus estimates. And analysts are upbeat about the rest of the fiscal year (banks’ fiscal year end is October 31), though they’re not as enthusiastic as they were about the second quarter. In the third quarter, the banks’ profits are expected to increase 45 per cent. And for the full fiscal year, profits are expected to increase 44 per cent.

These more modest growth rates reflect the fact that last year’s second-quarter earnings season was the low point for the banks, as the full weight of COVID-19 made itself felt in that quarter. Things improved after that, and the banks’ earnings were less impacted.

Dividends will rise again

As the economy rebounds and profits recover, the banks find themselves sitting on piles of cash. But they’ve been prevented from raising their dividends by the Office of the Superintendent of Financial Institutions, or OSFI. This regulatory body imposed restrictions on dividend increases by the banks in March 2020. That’s because the OSFI wanted to safeguard the banks’ liquidity positions so that they could keep lending and manage a worsening loan default situation in case the economy went into a tailspin.

With much of the worries about loan defaults in the rearview mirror, it seems only a matter of time before the OSFI removes the dividend restriction. And when it does, the banks are expected to raise their dividends by sizable amounts, given their large cash balances and the fact that payout ratios are drifting lower in relation to their targeted ranges as earnings rebound.

This is an edited version of an article that was originally published for subscribers in the July 2, 2021 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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