Bank Earnings Overview

In one of our most anticipated newsletter releases of the year, I will be diving into the Big Bank earnings inside this newsletter.

This newsletter is going to be longer than most, so this week, I’m not going to speak on my portfolio moves outside of the mention that I took a position in recent Bull List stock ASML Holdings. However, I had mentioned this in prior weeks, so this should be no surprise.

As always, the recaps will generally be short for each company, and instead, I will dive deeper into the numbers for all of the banks as a whole and target key performance indicators.

Let’s dive right into it.

Bank of Nova Scotia (TSE:BNS)

After a long tenure of being the worst-performing bank in the country, Scotia is set to close out the year in the middle of the pack. The company is up 32% on the year, a fine performance.

Headline numbers were relatively in line with estimates, missing on both revenue and earnings by negligible amounts. The key point here is that the company’s provisions for credit losses have really started to stabilize (more on that in the provisions section), and the market is liking that. If you remember from 2023, provisions for credit losses continued to accelerate, and many investors didn’t know when they would stop, leading to some uncertainty.

The company’s Canadian segment net income was up 34% year-over-year, while revenue was up 5%. Considering the company’s expenses rose by 4%, we can directly attribute most of the growth in net income to a reduction in total provisions for credit losses.

The main positives from the quarter: Stabilizing provisions for credit losses. A large reduction in performing PCLs, likely a result of declining rates in Canada, allowing the bank to move more performing loans off of provisions.

The main negatives from the quarter: Despite a 34% YoY boost to earnings per share in its Canadian arm, overall earnings declined by 0.2%. The company is having difficulty growing overall, and the 30%+ gains this year were primarily driven by a reduction in provisions for credit losses, not growth of the underlying business. Scotia still needs an operational turnaround, as positive news on the PCL situation will not fuel returns over the long term.

Royal Bank (TSE:RY)

It was another rock-solid quarter from Royal Bank, a Canadian Foundational Stock here at Premium. Earnings per share of $3.07 topped expectations of $3, and returns on equity came in north of 15%.

The company’s acquisition of HSBC is driving a lot of the company’s growth at this point in time. It had expected to take a couple of years to realize $740M in synergies from the acquisition. Thus far, it has already realized 55% of those synergies, so it is well on pace.

There wasn’t a particular area that did any better than the others, which has not been the case in the past. It was just an all-around solid quarter from Royal, who continues to confirm our reasoning for having it as a Canadian Foundational Stock.

The main positives from the quarter: The company is firing on all cylinders in pretty much every aspect of the business, with personal and commercial banking, wealth management, and capital markets year-over-year growth all in the mid to high teens.

The main negatives from the quarter: The company reported one of its higher quarter-over-quarter growth rates in terms of provisions for credit losses over the last few quarters. However, considering the company has some of the best PCL ratios out of all the major institutions, it is looking like the market has generally shrugged this off.

Bank of Montreal (TSE:BMO)

BMO’s troubles regarding provisions for credit losses have not ended, and these continue to impact the bank’s net income. I won’t get into it too much here, and instead, we will focus on those issues inside of our PCL segment. But it’s still not looking good for BMO on that front.

From a headline numbers basis, the company topped revenue expectations but earnings per share of $1.90 came in well below the $2.38 expected. All that said, the company did jump in share price after it reported earnings, primarily due to some commentary on provisions made by management.

The company bumped the dividend by 5%, and it announced that it plans to buy back up to 20 million of its shares, signalling that management clearly thinks the bank is undervalued.

The main positives from the quarter: It was a relatively poor quarter. However, the company’s CEO stated that the bank’s credit issues are “contained” now, and the environment will be better in 2025.

The main negatives from the quarter: The company’s provisions (I’ll get to those later) are still the weakest amongst the major institutions and are taking a big bite out of earnings. They will need this to normalize throughout 2025.

Toronto Dominion (TSE:TD)

TD Bank posted arguably the weakest results out of the Big 6, and the anti-money laundering issues are looking like they will be impacting the company for the next year, at minimum.

The company exceeded revenue expectations, but this was primarily due to the sale of its Schwab shares and not operational results. On the earnings front, it reported $1.72 on the quarter, below the $1.80 expected and down by 5% year-over-year.

The company mentioned it will be difficult to grow earnings in 2025 because of the anti-money laundering issues.

The main positives from the quarter: Despite the company’s rough results, provisions are starting to normalize. This is key, because if the company was going through AML issues and provisions were accelerating, the stock price would be a lot lower than it is.

The main negatives from the quarter: The company’s AML issues and overall operational struggles have caused it to suspend all guidance and outlooks. This is a rarity for a Canadian bank and not a good thing to see.

National Bank (TSE:NA)

National reported a relatively soft quarter despite revenue and estimates hitting targets. Another interesting note as well is out of all the major banks to publish mid-term financial targets, National Bank was the only institution to hit every target in 2024.

The underlying numbers are strong for National Bank. However, the market likely expected stronger on the quarter as it faced some post-earnings pressure.

Another added element of this might be that the company reported 19% year-over-year growth in impaired loan PCLs. However, I’ll chat about that later.

The main positives from the quarter: Hitting guidance in 2024 was huge, as this was something a lot of banks had difficulty doing. National Bank still remains one of the fastest-growing institutions out of the Big 6.

The main negatives from the quarter: With the company’s current valuation, it will need to ensure the slower growth in its personal and commercial banking is a one-off or at least short-lived, or valuations could see pressure.

CIBC (TSE:CM)

With the magnitude CIBC was increasing their provisions for credit losses in 2023, if I had to have made a bet on where the company would be today, it would be nowhere near these share prices, which goes to show you how difficult it is predicting short-term movements.

The company has undergone a complete change in direction in 2024 and is now posting the best provision numbers out of any 6 bank, which is vaulting earnings. Earnings per share came in at $1.91, ahead of expectations for $1.78.

In addition to provisions vaulting earnings, the company’s Canadian arm is reporting strong results, with high single-digit revenue growth and double-digit earnings growth.

The main positives from the quarter: Continued decline of provisions is putting the bank in a position where earnings growth is accelerating due to strong underlying operations plus quarter-over-quarter declines in reported PLCs.

The main negatives from the quarter: To be completely honest, there wasn’t much not to like. In my opinion, they reported the best quarter out of the Big 6.

Key Performance Indicators

Earnings

Banks are relatively complex businesses, but for investors, looking at the earnings paints a pretty strong indicator.

The best banks in 2024 were CIBC, National, and Royal Bank by a long shot. So it’s really not all that surprising to see that they beat initially set earnings expectations on the year (see the green colour, which means ahead of estimates, whereas the red means missed).

The bulk of this outperformance has been these banks’ exposure to the Canadian economy. Not only have provisions for credit losses started to come down in the Canadian segments, but the Canadian economy, from a borrowing perspective, has also been extremely resilient, resulting in amplified earnings growth.

Meanwhile, those with heavy international exposure missed estimates and, in the case of BMO and TD Bank, struggled mightily, returning and losing 17% and -9%, respectively. In a year in which other major banks gained anywhere from 30-55%, this isn’t good.

If we look to the 2025 expected earnings estimates as well, you’ll notice one thing in particular, and that is that the Canadian-focused banks are expected to put up the highest levels of growth.

One of the key focuses on the quarter was definitely TD’s comments about how difficult earnings will be to grow in 2025 and even going as far as to suspend their guidance. If their best-case scenario is flat earnings, I’d say it’s more than likely we see earnings dip for TD Bank in 2025, which will ultimately put more pressure on its stock price.

Overall, the Canadian economy drove the winners in 2025 out of the banks, and they were clearly Royal, National, and CIBC. However, Scotiabank did have a reasonable year as well, the first one in a long time for them, earning 30%.

Valuations

The banks have had a heck of a year outside of a few (BMO, TD). As a result, valuations are sitting at levels well above what the market has historically paid for the banks.

For the banks outside of TD and BMO there has been a large run-up in price, which has led to them being overvalued relative to historical averages. For TD and BMO, it has been a decline in earnings that has caused them to be overvalued.

The interesting element here is not only are many of the major banks trading at premiums to historical averages, but they’re also trading at premiums even on a forward earnings basis (the bottom column). The only ones trading at what I would believe to be discounts to forward earnings are BMO, Scotia, and TD Bank.

Interestingly enough, these are the 3 banks that have the most uncertainty moving forward, so it’s really not a surprise to see them trading at lower valuations.

If you’re a stickler for valuations, the banks are likely not what you want to be adding to at this point in time. There is no doubt valuations today are significantly higher than what the market has paid over the last decade.

However, if you’re simply someone who dollar cost averages into positions and holds for the long-term, they’re perfectly fine to make continual additions to.

Provisions for Credit Losses

A few notes on the chart above. The first column is the bank’s total provisions reported on the quarter, in millions. The second column is their increase or decrease percentage-wise from last quarter (we want to see decreases or low increases), and the final column represents the total amount of their loan book set aside for provisions.

As we can see, there is a reason why CIBC has been the best-performing Canadian Bank over the last year. Provisions continue to decline on a quarter-over-quarter basis, and the company is realizing better than expected earnings as a result.

For the Bank of Nova Scotia and TD Bank, provisions have started to normalize as well.

It is clear that the banks are getting a better picture on the overall state of the economy and their loan books. As a result, they are able to predict more easily how much money they should set aside for bad loans.

For BMO, this isn’t quite the case yet, as you can see, with a 67% increase in QoQ provisions. However, the CEO stated that the overall credit situation should be solved this quarter and should begin to steady. Whether or not he’s telling the truth remains to be seen.

For National and Royal, the two stocks featured here at Stocktrades, the market generally shrugged off Royal Bank’s large quarter-over-quarter increase in provisions primarily because it was on the back of solid results. National, on the other hand, took a bit of a hit because of the accelerated growth, something I am keeping an eye on moving forward, but nothing I’m overly concerned with right now.

Dividends

Of note, if the “*” is beside a dividend growth number, this means the company made semi-annual raises to the dividend and this was just the raise in their most recent quarter.

For most banks, the dividends are well covered and a non-issue. TD Bank and Scotia, however, present some issues.

The higher-than-average dividend payout ratio for TD Bank is due to the company’s extensive fines and costs of its anti-money laundering scandal. If we view these costs as “one time” in nature, this payout ratio should normalize. However, the company had mentioned it will face difficulties heading into 2025 in terms of earnings growth, so they aren’t out of the weeds yet.

TD Bank raised the dividend by 3% to close out 2024, a much smaller raise than the company normally gives, which signals the difficulty in its operations at this point in time. With a payout ratio of 81% (nearly double the company’s historical averages), if earnings remain flat like they expect in 2025, there will not be much wiggle room here in terms of dividend growth.

For Scotia, this is a company that hasn’t raised the dividend in a few years because of consistent operational struggles. It looks like it has started to improve meaningfully over the last year here, and I do expect the company to get back to dividend growth in 2025, barring any unforeseen major setbacks.

Overall, I’m still a fan of the banks highlighted here at Premium

Royal and National remain my two favourite banks in the country, despite National reporting what I would call a pretty soft quarter. My total financial allocation has built up quite a bit over the last while, and I may need to trim some of my banking positions back to get to normal allocations.

However, this isn’t anything against National or Royal overall. This is simply more of a rebalancing after a 30%+ runup in price from both of them.

I do admire CIBC and the strong performance it has had over the last year or so, but I still don’t like the company’s overall loan book, and I never have. They simply have too much exposure to the Canadian economy and Canadian real estate for me to be comfortable holding. I wish it the best, and I hope it continues to perform well, but it would be one I am more than happy watching from the sidelines.

It’s been an outstanding 2024 for the banks, and there is a lot of uncertainty as to whether or not they can keep up the momentum in 2025. As someone who simply buys and holds for the long-term, short-term volatility to the upside or downside is irrelevant to me.

However, what I will say is that the 30%-40% return years are likely behind us. I expect banks to grow in line with earnings as the valuation gap has not only closed but has most banks trading at relatively rich valuations.