Banks are reporting higher provisions for credit losses
The third-quarter earnings reports released by Canadian banks so far indicate the growing threat of mounting expenses, according to Paul Harris, partner and portfolio manager at Harris Douglas Asset Management.
Both Royal Bank of Canada and TD Bank saw their Q3 results significantly impacted by higher provisions for credit losses, although the former registered an 8% annual increase in its net income while the latter reported an 8% drop in earnings.
At the same time, Harris believes that because of their significantly diversified revenue streams, the Big Six banks are sufficiently armed to surmount any challenges brought about by a slowing economy.
In an interview with BNN Bloomberg, Harris said that Canadian bank stocks are currently trading at discounted levels, and investors can expect significant returns in the long term should they choose to hold onto these stocks.
“You own them here, not sell them here,” Harris said. “Over the next couple years they are going to generate a great return, especially if the interest rate market changes.”
The Q2 financial results announced by Canada’s top banks last week reflected a highly uncertain economic environment, with provisions for credit losses surging as four of the top five banks missed analyst estimates.https://t.co/xBTG0ogzRu#mortgagenews #economy— Canadian Mortgage Professional Magazine (@CMPmagazine) June 1, 2023
What bank is poised for future strength?
Harris said that taking these trends into account, TD Bank is especially well placed to see gains in the near- and mid-term despite moderately missing estimates in Q3.
“[TD] certainly have the ability to buy other assets because of their capital base, which allows them to maybe grow their business a lot more than other Canadian banks,” Harris said.
TD chief financial officer Kelvin Tran assured that its approach to capital deployment remains consistent, with a focus on balancing acquisitions, organic growth, and shareholder payouts.
“This strategy depends what’s optimal any point in time, but we're really happy that we can do that by returning excess capital to shareholders,” Tran said, as reported by CTV News.