Canadian Banks

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SQRT
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Re: Canadian Banks

Post by SQRT »

Looks like we are off to a pretty good start re Q3 earnings. The banks have been surprisingly weak over last few months and this could be a catalyst for a bit of an uptick. At least that's my hope. RY's div increase was higher than I expected.
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Re: Canadian Banks

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Yes me too. 5% is very healthy. And still a PE of 12.6!
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Re: Canadian Banks

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thanks for the div inc RY!! :rofl:
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Re: Canadian Banks

Post by FinEcon »

SQRT wrote: 30 Jun 2017 07:09
Thegipper wrote: 29 Jun 2017 11:00
SQRT wrote: 29 Jun 2017 08:35 Yes an interesting and thoughtful article. Thanks for posting. The issue with the Canadian banks is indeed excess capital. Been this way for at least 20 years. When your domestic banking business earns ROE's in the 40% range but doesn't grow very quickly, it will throw off huge amounts of excess capital. Since the financial crises, efforts have gone into boosting capital levels which are now very high. So either, increase capital returned to shareholders (divs and buy backs), increase scope of business in Canada (difficult), or expand outside Canada. Most banks are doing the first and third. If they don't stumble in their foreign expansion (certainly not a given) it should continue to be pretty good for shareholders. Surprised they didn't mention tech disruption?
The three banks that have deployed capital into foreign expansion and have been successful are RY,TD and BNS. CM has a bad record in this area. BMO has mixed results. If foreign investment is the key to growth TD should be the best bet . Scotia's latin American exposure creates higher risk? RY has made some astute acquisitions in the USA and they are strong in the US capital markets.
Agree. Will be interesting to see how the CM acquisition goes. They have historically been poor at execution. Ry did stumble in their purchase of that retail bank (forgot the name) in the south east. I have always thought that the Scotia strategy was more risky or at least more volatile. I suspect their investments in Latin America are initially cheaper though.
SQRT, maybe you can shed some light on this.

Why do the big 5 focus insist on expansion into highly competitive markets or less competitive but less desirable markets rather than returning capital to shareholders? IMO, TD is the worst offender by far. BMO and CM might screw up the execution but at least they are shooting for higher margin business. RY got it right with Citi National but deals like that are few and far between in the most competitive, lowest margin banking market in the developed world.

Reminds me of Tim Hortons ever present asinine plan to expand abroad. Personally, I think it stems from the business school 'cult of growth' mentality in which academics and executives believe, falsely, that a growing business is better than a highly profitable but no/low growth business. It's great all right, for executives, employees and consultants but for shareholders, it's not the best deal.

What I want out of a Canadian Bank is a dividend payout ratio between 70 and 100% of earnings, paid out Australian bank style.
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Re: Canadian Banks

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I am itching to buy more banks but I feel it may be safer to see what happens to the RE market in the next 6 months. Toronto seems to be beginning to dive and with the OSFI forced stress test pending in the fall and increase in rate it may catalyze that even further. The banks as a group may pull back quite a bit.
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Re: Canadian Banks

Post by Koogie »

This was posted elsewhere today.. I just thought the big picture numbers for comparative Big 5 exposure to HELOCs and residential mortgages were interesting.

canadian-banks-get-case-of-heloc-indigestion
https://www.fool.ca/2017/08/28/canadian ... digestion/
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Re: Canadian Banks

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It seems to me that RBC and TD have half the residential exposure between them. BMO has the least.

Maybe the guy was talking about some other numbers?
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Re: Canadian Banks

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He was referring to the HELOC numbers, not the residential mortgages, in terms of forward trouble.

I'd say that BMO at 35B$ is more troubling than RY at 45B$ given their relative sizes and management. Not of course knowing anything about the quality of those loans, what market they are in or how current they are.

Also interesting that TD has written about twice as much in HELOC loans as the next biggest competitor.
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Re: Canadian Banks

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If Heloc loans are a big concern BNS has the lowest exposure.
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Re: Canadian Banks

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On first read, the TD results are very strong. US ROE is up to 10.3% and shows that the US strategy is paying off nicely. Big increase in their share repurchase program. Share price should reflect hopefully. Again they demonstrate the strength of their universal business model.
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Re: Canadian Banks

Post by Thegipper »

SQRT wrote: 31 Aug 2017 08:36 On first read, the TD results are very strong. US ROE is up to 10.3% and shows that the US strategy is paying off nicely. Big increase in their share repurchase program. Share price should reflect hopefully. Again they demonstrate the strength of their universal business model.
Notwithstanding the CBC campaign against TD over alleged aggressive selling techniques TD is my favoured bank. It has been by far the most successful Canadian bank with USA strategies.
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Re: Canadian Banks

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A 3% bump for a Cdn bank is quite unusual but certainly welcome.
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Re: Canadian Banks

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nisser wrote: 24 Aug 2017 13:06 I am itching to buy more banks but I feel it may be safer to see what happens to the RE market in the next 6 months. Toronto seems to be beginning to dive and with the OSFI forced stress test pending in the fall and increase in rate it may catalyze that even further. The banks as a group may pull back quite a bit.
Anything can happen of course, but your concern seems overstated. Especially in light of the Q3 results.
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Re: Canadian Banks

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SQRT wrote: 31 Aug 2017 08:36 On first read, the TD results are very strong. US ROE is up to 10.3% and shows that the US strategy is paying off nicely.
Do you have any comment on FinEcon's question upthread from a week ago today? I'd also be interested in your thoughts on the matter.
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Re: Canadian Banks

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Lazy Ninja wrote: 31 Aug 2017 10:10
SQRT wrote: 31 Aug 2017 08:36 On first read, the TD results are very strong. US ROE is up to 10.3% and shows that the US strategy is paying off nicely.
Do you have any comment on FinEcon's question upthread from a week ago today? I'd also be interested in your thoughts on the matter.
Not really. I generally don't see his posts but the question is valid. Every bank will be different but since the Canadian banking system is so strong the question would be can any bank transport its Canadian success to other markets? In the end if they can earn more than their cost of capital shareholders will be rewarded. Looks like TD is succeeding (finally) in the US but the jury is still out for BMO. In the end it comes down to execution.

I think in the long run, a strategy consisting solely of remaining in Canada, buying excess capital back, will only foster more Govt protection and regulation as our banks shrink compared to international competitors. Banking is one of the few "world class" businesses in Canada. Why would you want to hobble them?
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Re: Canadian Banks

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Thanks for the response. Much appreciated.
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Re: Canadian Banks

Post by gobsmack »

This is probably a silly question but, concerning the share repurchase program TD has announced, I don't quite understand how that benefits shareholders unless these shareholders are selling the stock.

If you are buying and holding the stock for the long run, the program probably increases the odds the price will go up but the price may very well come back down once the program winds down. It almost seem like the announcement of such a program would give more weight to the strategy of selling the stock, hence capturing the money the company is returning to you today, and possibly waiting for a better entry point later down the road once the program winds down. Apart form the fact that a company announcing a share repurchase program is signaling to shareholders that it is in great financial shape, I don't quite understand why the media talks about money being returned to shareholders. If you want to benefit from the program, you have to sell the stock and stop being a shareholder, no?
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Re: Canadian Banks

Post by FinEcon »

SQRT wrote: 31 Aug 2017 10:25 Not really. I generally don't see his posts but the question is valid. Every bank will be different but since the Canadian banking system is so strong the question would be can any bank transport its Canadian success to other markets? In the end if they can earn more than their cost of capital shareholders will be rewarded. Looks like TD is succeeding (finally) in the US but the jury is still out for BMO. In the end it comes down to execution.


Sounds like your answer is the "cult of growth". Fair enough, from the perspective of growing a firm it makes perfect sense but I think it is not nearly as true from from an individual equity investor's perspective.
SQRT wrote: 31 Aug 2017 10:25 I think in the long run, a strategy consisting solely of remaining in Canada, buying excess capital back, will only foster more Govt protection and regulation as our banks shrink compared to international competitors. Banking is one of the few "world class" businesses in Canada. Why would you want to hobble them?
The only reason they are so profitable is because because the industry is hobbled, i.e. American or UK banks are effectively kept out of Canada. As good thing in my opinion but that could be my own, possibly incorrect, view of banks as utility like businesses and not so much a service centric business. If Wells, JPM or HSBC were allowed to eat CWB, NA or even BMO the Canadian banks ROE would fall to high single digits or low double digits in short order and the shares would probably lose 30-40% overnight as declining future profit expectation was capitalized.

Thanks for taking the time to provide some insight.
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SQRT
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Re: Canadian Banks

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gobsmack wrote: 31 Aug 2017 10:53 This is probably a silly question but, concerning the share repurchase program TD has announced, I don't quite understand how that benefits shareholders unless these shareholders are selling the stock.

If you are buying and holding the stock for the long run, the program probably increases the odds the price will go up but the price may very well come back down once the program winds down. It almost seem like the announcement of such a program would give more weight to the strategy of selling the stock, hence capturing the money the company is returning to you today, and possibly waiting for a better entry point later down the road once the program winds down. Apart form the fact that a company announcing a share repurchase program is signaling to shareholders that it is in great financial shape, I don't quite understand why the media talks about money being returned to shareholders. If you want to benefit from the program, you have to sell the stock and stop being a shareholder, no?
The idea is that since there are fewer shares, EPS will grow faster and the shares will be worth more. Thus all shareholders gain. You can certainly debate whether the buy backs are at a good price though.
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Re: Canadian Banks

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True if float is actually decreased and not just put back into the Corp as Treasury shares. Cancelling shares is the best for remaining shareholders since each remaining share has a bigger slice of the company. The biggest issue, as you suggest, is whether the buyback price is low enough to warrant spending the cash.
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Re: Canadian Banks

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AltaRed wrote: 31 Aug 2017 13:29 True if float is actually decreased and not just put back into the Corp as Treasury shares. Cancelling shares is the best for remaining shareholders since each remaining share has a bigger slice of the company. The biggest issue, as you suggest, is whether the buyback price is low enough to warrant spending the cash.
In the case of TD, they were, and are being, cancelled. Details in linked news release.

http://td.mediaroom.com/2017-08-31-TD-B ... mon-Shares
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Re: Canadian Banks

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I always consider share buybacks as a kind of corporate piggybank. If I have excess cash and don't have any acquisitions in mind nor dividends to issue/increase, then the buyback enables me to make a future offering when I have something to spend the money on. I think it represents a lack of opportunity to the management at the present time. Of course they are also paid to do it.
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Re: Canadian Banks

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AltaRed wrote: 31 Aug 2017 13:29 True if float is actually decreased and not just put back into the Corp as Treasury shares. Cancelling shares is the best for remaining shareholders since each remaining share has a bigger slice of the company. The biggest issue, as you suggest, is whether the buyback price is low enough to warrant spending the cash.
Shares held by the company are treated like they are cancelled for accounting purposes. Whether they are cancelled or not.
Last edited by SQRT on 31 Aug 2017 17:35, edited 1 time in total.
SQRT
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Re: Canadian Banks

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kcowan wrote: 31 Aug 2017 15:30 I always consider share buybacks as a kind of corporate piggybank. If I have excess cash and don't have any acquisitions in mind nor dividends to issue/increase, then the buyback enables me to make a future offering when I have something to spend the money on. I think it represents a lack of opportunity to the management at the present time. Of course they are also paid to do it.
As you can imagine, capital management is very important at banks. Cash is hardly ever an issue, other than for short term liquidity. Probably more important than other types of companies. Too much capital and ROE is depressed. Too little capital and regulators are nervous. As I mentioned in an earlier post, the Canadian banks are "capital gushers". TD earned over 46% ROE (this quarter) on their main Canadian retail business which is generally only growing by single digits. That creates a lot of excess capital. Until recently this excess capital was used to increase capital ratios as mandated by OSFI. Now that the capital levels are in compliance with new requirements and are quite high, they have to do something else.

They could increae the div payout ratio but that reduces flexibility in the event of future earnings declines. The absolute worst thing a bank could do is cut their div. as investor and depositor confidence is crucial(Home Capital?). So buybacks in the short turn and regular div increases in the medium turn.

Some people suggest management likes to buy back capital to juice their option cash outs. I guess you could say the same thing about increasing earnings. In any event there can be no denying that shareholders are better off if capital is viewed as a scarce resource and managed well.
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Re: Canadian Banks

Post by Shakespeare »

https://www.theglobeandmail.com/globe-i ... e37006479/
International Financial Reporting Standard 9, or IFRS 9, changes the way banks recognize loan losses....

this backdrop offers an ideal time to adopt the new accounting standards because the immediate impact won't be severe.

Some banks may have to set aside larger reserves, which will reduce book values (and raise one measure of valuation), but the analyst doesn't expect any major shifts.

The accounting changes, though, will show up when something goes wrong....
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