As the President and Founder of Pubco Finance Solutions, people look to me for Finance related answers.

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So, when banks missed their earnings target in May...simultaneously recorded excessively high Loan Loss Provisions (i.e., write off loans)...

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Then declared an increase in dividend payouts...

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It begs the question, "What's going on?"

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Shouldn’t the banks fear losses when the impending recession arrives?

 

Are the banks lending...or are they closed for business? 

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Some data to note, we'll use TD:

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1) Previously, related to Covid, TD announced loan loss provisions of $1.1 Billion in Canada and $600 Million in USA.

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2) More recently, TD set aside for Loan Losses of $599 Million in this quarter in May 2023, Q2 vs $25 Million Q2 last year (see appendix of all bank Q2 loss provisions vs last year).

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3) Q2 reporting TD, said:

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“Canadian Personal and Commercial Banking net income was $1,625 million, an

increase of 4% compared with the second quarter last year. Revenue was $4,404 million, 

an increase of 11% reflecting higher margins and volume growth. The segment

delivered a seventh consecutive quarter of positive operating leverage.”

 

Answer:  Note the bank’s earnings are growing for 7 consecutive quarters because of 

higher margins and volume = they give the two reasons why they are making tons of profit.

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Higher Margins = Simple, if for almost 15 years the bank was lending at 3%, making

profit on lending was not easy, versus lending at 8%+ (currently).

 

Therefore, if they lend at higher margins, they earn excessively high returns to cover inflationary costs and generate much more cash flow to increase dividends to protect investors’ real returns -- And most of all stabilize share price.

 

Bottom Line: OPEN THE LENDING FLOOD GATES TO EARN HIGH INTEREST RATE REVENUE!

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"Rates will come down...

but at that point the high-margin loan

volumes will also stop."

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Higher Volume.  Let's use a simple example.

 

TD set aside almost $2 Billion in Loan Loss Provision pre-Covid.

 

Why? Every Canadian retirement, pension fund, portfolio is heavily overweighted to 5 or 6 Canadian Banks who pay out stable real Dividends and NEVER depreciate in long term value.

 

The Banks take losses upfront before they even happen, so there is no shock to the net income and share price.

 

We see this further in the Q2 2023: TD set aside $48 million against loans that are still repaying their debts and booked $599 Million, just in case….these sometimes get reversed, but mostly they do not.

 

Certainly, in the case of Covid, the $2 Billion losses never materialized. So if you have

already made an allocation to LOSSES which never materialized, what do you tell your

Risk Department?

 

"OPEN THE LENDING FLOOD GATES AND INCREASE THE VOLUME OF LOAN LENDING AS WE HAVE THE ROOM TO TAKE THE LOSSES (without affecting our bottom line)!"

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Now, we've got the answer – Now I understand when I hear “I on boarded 11 new clients in the last 6 months” from one of my Bank Account Manager friends.

 

And after 25 years in Banking and Finance, I now understand why Canadian Banks are Lending more that I've ever seen.

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A major point to NOTE:

 

The bank knows these high margins and high loan volume are temporary.

 

Why?

 

Because interest rates must return to a normal (what is normal remains to be seen) level.

 

Remember -- 10% of the Big-6 lending is in Commercial Property Exposure, never mind the consumer imagination they are all millionaires because they have homes worth $2 million (when mortgage rates were Variable 1-2%), what happens to home values when mortgage rates renew at 8%, all those millionaires who bought a Tesla will be looking to get back into a Honda Civic, and the big C in GDP brings on a real recession.  

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So, rates will come down, but at that point, the high margins and loan volumes will also stop.

 

Bottom Line: CLOSE THE LENDING FLOOD GATES ITS NOT WORTH THE RISK AT LOW INTEREST RATES.

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