Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, shares financial headlines and offers context for Canadian investors.
Bank on higher interest rates leading to increased profits
U.S. earnings season is in full swing, and the banks were some of the first to step up to the plate. They didn’t all hit home runs, but investors were likely quite pleased with their performance. (All values below are in U.S. currency, unless otherwise stated.)
- Bank of America (BAC/NYSE): Earnings per share of $0.81 (versus $0.77 predicted). Revenue of $24.61 billion (versus $23.57 billion predicted.) Shares rose more than 17% over the last five trading days.
- Goldman Sachs (GS/NYSE): Earnings per share of $8.25 (versus $7.69 predicted). Revenue of $11.98 billion (versus $11.41 billion predicted). Shares are up more than 6% over the last five trading days.
- JP Morgan (JPM/NYSE): Earnings per share of $3.12 (versus $2.88 predicted). Revenue of $33.49 billion (versus $32.1 billion estimate). Shares are up 16.5% over the last five trading days.
- Wells Fargo (WFC/NYSE): Earnings per share of $1.30 (versus $1.09 predicted). Revenues of $19.51 billion (versus $18.78 billion predicted). Shares up 11% over the last five trading days.
- Morgan Stanley (MS/NYSE): Earnings per share of $1.47 (versus $1.49 predicted). Revenues of $12.99 billion (versus $13.3 billion predicted). Shares up 3% over the last five trading days.
- Citigroup: Earnings per share of $1.50 (versus $1.42 predicted). Revenues of $18.51 billion (versus $18.25 billion predicted). Shares up over 9% the last five trading days.
The broad takeaway from these earnings results is that banks are using expanded interest rate margins (the difference between what they pay out in interest and what they charge for lending money) to boost profits and offset losses in other areas like investment banking. Bank of America has a larger retail banking business than the other banks, so it makes sense that its earnings surprise was more substantial. Morgan Stanley is much more investment banking oriented, and its bottom line was hit by the lack of IPOs and debt/equity issuances.
Given that Canadian banks are much more in the mould of Bank of America than they are dependent on the investment banking side of things, I would expect similarly good news in their future. TD Bank (TD/TSX) has the largest U.S. exposure of the Canadian “Big Six” and therefore should track a similar trajectory to what we’ve seen with these U.S. banks over the past week.
Canadians looking to invest in these U.S. banks can do so through TSX-listed ETFs, such as the Harvest US Bank Leaders Income ETF (HUBL), RBC U.S. Banks Yield Index ETF (RUBY) and BMO Equal Weight US Banks Index ETF (ZBK). They can also get exposure to JP Morgan, Bank of America and Goldman Sachs in Canadian dollars through Canadian Depository Receipts (CDRs) listed on the Neo Exchange.
Food costs continue to drive Canadian inflation
Consumers, investors and central bankers around the world are desperately looking for signs that tighter monetary policy is succeeding in bringing down inflation.
The good news Statistics Canada announced on Wednesday was that inflation dropped for the third month in a row.
The bad news was that it only declined slightly, from 7% to 6.9% (it peaked at 8.1% in June). Many economists speculated earlier in the week that inflation would drop by a larger margin. As a result of the relatively high inflation numbers, most market watchers are now predicting another 0.75% rate increase by the Bank of Canada next week.