Bank Earnings Overview

It’s that time of year again. Canadian banks rolled out all of their earnings last week. I looked through them this week and will provide a comprehensive overview.

With the potential for extreme hardships in the Canadian economy, I believe it is now more important than ever to keep a keen eye on bank earnings.

Tariffs have a real chance of bringing significant pain to the Canadian economy. The difficulty is we have no idea how long tariffs will last or how severe they will be.

We are dealing with arguably one of the most unpredictable US Presidents of all time. With all of the market volatility we’ve faced over the last 5 years, including a global lockdown, near double-digit inflation, and the fastest pace of rate increases in history, it would be nice to get some relief on the volatility front.

But that doesn’t look to be the case.

I sympathize with those who could lose their livelihoods because of what economists state is an entirely meaningless trade war. I hope there is a resolution shortly.

However, until then, we must zoom out and look at the long-term returns the market has provided us so that we can avoid making short-term mistakes.

With that said, let’s dive into the banks’ earnings, which should give us a pretty solid indicator of the direction of the Canadian economy. As always, I’ll go into each quarter briefly before expanding into important KPIs across all banks.

Royal Bank of Canada (TSE:RY)

Key Highlights:

Revenue: $16.74B (7.6% higher than estimates)
EPS: $3.62 (11.5% higher than estimates)
Provisions For Credit Losses: $1.05B (36% QoQ increase)
Allowance For Credit Losses: 0.68%

From a headline basis, it was a relatively solid quarter for Royal Bank. However, the stock took a bit of a tumble post-earnings, which I believe is due to several reasons.

For one, and I have mentioned this before, and it is also why I trimmed my Royal Bank position, valuations are pretty high here. When valuations get high, execution is necessary, and there were a few concerning signs on the quarter.

The main issue, which has been the focal point for a couple of years, is provisions for credit losses. The company reported a significant QoQ increase in PCLs, which is no doubt going to impact the company’s stock price as provisions ultimately come out of earnings. If the market believes Royal’s provisions will accelerate, earnings will likely dip.

Additionally, we are finally starting to see some weakness in terms of the bank’s Canadian segment. For the better part of a year, this was the driving force behind the company. Growth is still strong, but it likely wasn’t enough to justify the 15x earnings multiple.

Overall, I’m not surprised to see a bit of consolidation out of Royal. It was a solid quarter, but there are some concerns moving forward, which I’ll dig into in-depth in the KPI sections.

Toronto Dominion Bank (TSE:TD)

Revenue: $15.03B (13% higher than estimates)
EPS: $2.02 (1.8% higher than estimates)
Provisions For Credit Losses: $1.2B (8.5% QoQ increase)
Allowance For Credit Losses: 0.99%

Toronto Dominion had a strong quarter from a headline basis, topping expectations. However, expectations are generally low for the bank, as it is caught up in uncertainty and added expenses regarding anti-money laundering mitigations.

While revenue is up 9% YoY, earnings are flat. Considering the bank stated it wouldn’t grow earnings in 2025 due to the AML situation, this isn’t surprising.

The company’s struggles south of the border are apparent. Because of its need to restructure its balance sheet south of the border, US revenue declined by 24% year-over-year. When we adjust out its US assets that it either sold or restructured, revenue increased by 1%. Expenses in its US segment, on the other hand, increased by 11%, primarily due to costs from its anti-money laundering situation.

The company seems to be stabilizing from a provisions perspective over the last few quarters, but its operations have really struggled over the last 2 years. From a valuation standpoint, it seems like a solid contrarian play, but with flat earnings expected this year, investors are likely flooding to better-performing banks.

Bank of Montreal (TSE:BMO)

Revenue: $9.26B (7.8% higher than estimates)
EPS: $3.04 (26.5% higher than estimates)
Provisions For Credit Losses: $1.01B (33% QoQ decrease)
Allowance For Credit Losses: 0.69%

The Bank of Montreal reported a surprise this quarter, topping earnings estimates by a wide margin. The bulk of this wasn’t necessarily due to strong operations but a sizeable quarter-over-quarter reduction in provisions for credit losses.

The bank was certainly trending in the wrong way when it comes to provisions, which is what drove me to sell the bank in early 2024. A lot of analysts likely had provisions marked much higher for the bank, and as a result, the bar for earnings estimates was set pretty low.

The bank’s Canadian arm is doing well, with loans up 6% and deposits up 9%. Although net income is down 3% year-over-year due to elevated provisions, it was up 17% on a quarter-over-quarter basis due to the decline in PCLs over that same timeframe. On the other hand, its US segment is struggling a bit, with operations flat for the most part.

If you are somewhat frustrated by missing a large runup in BMO’s price over the last couple of months, just know this situation is difficult to predict. The bank could have just as easily reported another acceleration in provisions, which would have no doubt led to more fear and uncertainty.

It was a good rebound quarter, but I’d need a reasonable string of strong results and lower provisions before I’d ever regain full confidence.

CIBC (TSE:CM)

Revenue: $7.2B (6.1% higher than estimates)
EPS: $2.20 (11% higher than estimates)
Provisions For Credit Losses: $573M (37% QoQ increase)
Allowance For Credit Losses: 0.71%

After a long string of strong results, CIBC reported a relatively soft quarter. It’s not like headline numbers were all that bad, but a QoQ spike in provisions after a long run of solid provision reporting is causing the stock to go on a bit of a slide, now down 13% since December.

I have never been a huge fan of CIBC as a long-term hold, primarily due to its extensive exposure to the Canadian housing market. We are beginning to see some cracks forming in this area, with impaired loans in its residential mortgages increasing from 0.25% last year to 0.31% this year.

The additional thing that worries me a bit is the delinquency rates among non-insured mortgages in the GTA. It has increased from 0.21% to 0.36% in just one year.

If we look back 6-7 years ago, this number was at 0.07%. So, at this point, delinquent mortgages in the GTA are around 420% higher than in 2017.

Continued pressure in that area of the market, which is almost a guarantee if tariffs persist, could cause provisions to be relatively rocky moving forward.

Outside of that, operations remain relatively strong, with double-digit revenue and earnings growth. However, as mentioned, some weakness in its loan book ultimately resulting in higher provisions is weighing on the stock.

Bank of Nova Scotia (TSE:BNS)

Revenue: $9.3B (5.6% higher than estimates)
EPS: $1.76 (5.3% higher than estimates)
Provisions For Credit Losses: $1.16B (12.6% QoQ increase)
Allowance For Credit Losses: 0.91%

The Bank of Nova Scotia’s struggles continue. I sound like a broken record here, but the bank just can’t seem to get out of its current rut.

While most bank’s Canadian arms are doing quite well, Scotia’s continue to struggle. Combine this with its long-standing struggles in the international market, and you have a bank that has been spinning its tires for the better part of 6-7 years.

Earnings increased by 4% year-over-year, which is among the lowest out of the Canadian banks. Returns on equity continued to decline along with the company’s overall efficiency ratio. Loans are up around 1%, while deposits are up 4%. Its international segment saw earnings decline by 7%, loans decline by 1%, and deposits by 1%.

Overall, there wasn’t much to like here.

National Bank (TSE:NA)

Revenue: $3.23B (7% higher than estimates)
EPS: $2.93 (10.1% higher than estimates)
Provisions For Credit Losses: $254M (56% QoQ increase)
Allowance For Credit Losses: 0.60%

It was a pretty strong quarter for National on a headline and operational basis. The acquisition of CWB is finally closed, and over the next year or so, we’ll start to get more streamlined results.

Revenue is up 19% year-over-year, and earnings are up 13%. Personal banking was up 4% YoY, commercial banking 13%, and overall deposits were up around 9%.

The main issue we are starting to see from National and why we are seeing some impacts to its share price is on the provision side of things. After reporting a relatively strong year in which provisions didn’t move by all that much considering the economic environment, this quarter was a blowout provision-wise, with 56% QoQ growth.

This is now the second straight quarter that National has reported higher provisions than expected, and it will be interesting to see if this is a continued trend or a one-off. If we look to the allowance for credit losses (listed at the start of each bank’s overview), the company still has the lowest allowances for credit losses among the major banks. The key thing we are going to figure out here in the next few quarters is whether or not this is a sign of a higher-quality loan book or if the bank was possibly a bit too conservative when it comes to booking provisions.

Overall, large provisions overshadowed what was a relatively strong quarter operationally.

Bank KPIs

Earnings Projections

This section has been one I’ve added in the last few newsletters and has been well received. It compares earnings estimates for the banks at the start of the year to earnings estimates now.

Often, this can tell you a lot about the quality of quarters from the Canadian banks, and I believe the estimates are a solid indicator.

I’d view the 3 worst quarters of the banks coming from National, TD Bank, and Scotiabank. So, it’s not all that surprising to see them have some small revisions in expected earnings to the downside or in the case of Toronto Dominion, almost no revisions.

On the flip side, we saw Bank of Montreal report a material decrease in provisions for credit losses, which ultimately caused the largest revisions upwards on an earnings basis. Royal Bank, although provisions for credit losses were higher (and I’ll get to that in a bit), is reporting the strongest operational numbers by a wide margin, which ultimately caused a boost.

Overall, none of the banks reported weak enough earnings to cause material downgrades in terms of earnings projections.

Allowances for loan losses

Typically, I focus on provisions for credit losses on a quarterly basis. However, this quarter, I want to focus on total allowances for loan losses, which is the cumulative amount of money the banks have set aside for bad loans. If a bank has $100B in loans and $1B set aside in allowances, its allowance ratio would be 1%.

Allowances for loan losses and provisions for credit losses are two different things. Yet, many investors don’t understand how they work.

A simple explanation is to think of allowances for loan losses as the piggy bank. Provisions for credit losses are the money you put inside the piggy bank every quarter.

In the event of a recovery of provisions for credit losses, like we witnessed post-Covid, you are removing money from the piggy bank and putting it back in your figurative pocket. When a loan is entirely written off, it is removed from allowances, but these do not go back into your pocket.

Allowances are a cumulative amount that is shown on a bank’s balance sheet. Over time, that piggy bank fills up with money, and later on down the line, the bank can take money out of that piggy bank to do two things: Either pay completely written-off loans or add it back into their net income in the case of a recovery.

The key numbers we want to keep an eye on here are the large increases in allowances, as they can suggest a deterioration in credit quality. Although National Bank reported a significant increase, their overall allowances are low enough that I am not too concerned at this point. On the other hand, Toronto Dominion and Bank of Montreal are companies investors need to keep an eye on.

Royal Bank and Scotiabank reporting mid-single-digit allowances is simply an inevitable situation due to the economic backdrop and is nothing overly concerning. In the case of CIBC, it contributed aggressively to provisions in 2023. As a result, we are seeing a reduction in allowances as things aren’t as bad as expected.

Canadian segment growth

The last KPI I want to review on the quarter is each bank’s Canadian operations. The Canadian arms of these banks have been extremely resilient over the last year or so, which is one of the main reasons the banks did as well as they did.

Until this quarter, the banks with the most extensive Canadian exposure (National, Royal, and CIBC) had the strongest earnings growth. Now, with provisions coming in much higher than expected for National, earnings have taken a bit of a hit year-over-year.

For Royal and CIBC, they continue to do well in this area, but it is also important to note that a decent amount of this growth is coming from the acquisition of HSBC.

When we look to BMO, the EPS decline is likely due to higher provisions, as the company is seeing relatively strong loan and deposit activity. When we look to Scotiabank, its struggles persist in the Canadian and international markets. We can see it has some of the lowest deposit and loan rates out of any of the Big 6. In addition to its struggling international segment, this is weighing on earnings.

For CIBC, the lack growth on the loan and deposit end is concerning. Eventually, the company’s scaled-down provisions will stop impacting earnings as much, and growth will need to come from operations. 2%~ growth in loans and deposits is well behind most banks.

My overall thoughts on the quarter

As Premium members will know, I trimmed my Big Banks (National and Royal) at the end of 2024. Primarily, I did this due to an over-allocation after their runup, but also due to what I felt were higher provisions.

There was no clear standout here when it comes to a top performer. In fact, I believe all the Canadian banks reported relatively soft earnings compared to 2024.

It could be a sign that the Canadian economy is starting to show some cracks. Although I view these companies as long-term buy and holds, this is not the same operating environment the banks were in when they posted their strongest returns (post-financial crisis leading up to the pandemic).

Canadians love their bank stocks, and I do, too. However, I do feel many Canadians over-allocate themselves to Canadian banks. The banks remain a small portion of my portfolio, around 7% if you include Equitable Bank, and will stay around that size for the foreseeable future.