Making sense of the markets this week: August 30, 2021

Big earnings from the big Canadian banks

The Big Six Canadian banks (Royal Bank of Canada, TD Bank, Scotiabank, BMO, CIBC and National Bank) released quarterly earnings reports this week and, as expected, they all put some big numbers up on the board. Thanks to high levels of government financial support for individuals and businesses, the banks have not yet experienced an economic shock due to COVID. 

To manage risk, banks always set aside emergency funds, known as provisions for credit losses or loan-loss provisions. Given their more favourable prospects, the Big Six have been able to remove some of those monies from the safety net and add them to the earnings column. For an example on that front: In its most recent report, RBC recovered $540 million of provisions for credit losses, compared to the $96 million that it recovered in the second quarter. 

The banks have profited handsomely from their wealth management businesses, thanks to fees and robust markets. That has been a main driver throughout much of the pandemic. From Thursday’s reports, we saw a 13% increase at TD’s Canadian retail unit and a 25% jump at CIBC. 

The banks have been mostly beating on the earnings and revenue fronts. 

They have recovered from the pandemic, and then some. Thanks to Mike Heroux from Dividend Stocks Rock who put together the tables below, which compare bank performance in key areas from the third quarter of 2019—pre-pandemic—to the recent third quarter in 2021. The figures in these tables are in millions. The Common Equity Tier (CET1) is a measure of financial strength and the ability to absorb losses; a higher number means more assets are held for that purpose. 

We see some impressive growth coming though the pandemic. National Bank and Royal continue to separate from the pack in many ways, and it’s common to see bank analysts select those two as the top picks. National Bank continues to be the top pick of Heroux as it grows through acquisitions. Heroux also suggests investors look to TD based on valuation and that more favourable CET1 ratio. 

From most of the reports or estimates I’ve read, it might be a good guess that we will see dividend increases resume in the first quarter or second quarter of 2022. And given the release of the loan-loss provision and greater overall financial health, it is expected that the banks could make up for lost time with dividend increases above 10% for many quarters. 

Now that would be a reward worth waiting for. 

I’m happy to be long Royal Bank, TD and Scotiabank. And yes, Mike, I wish I had bought National Bank a few years ago—as you said I should. 

The bitcoin bounce back to $50K

It has been a wild ride for bitcoin and bitcoin investors. After falling below $30,000 U.S. in midsummer, the price of bitcoin has been fighting back in very solid and regular fashion, cresting $50,000 on Aug. 23 before falling back slightly. 

In this space, we covered the price pressure offered by Elon Musk’s (CEO of Tesla) tweets, and by the bans and regulation by the Chinese government. 

It was suggested that moving away from China and to a greener energy mix might provide some much-needed support for the prevailing cryptocurrency. (In June of 2021, we addressed what the heck is going on with bitcoin.) That theme appears to be playing out, and new sources of bitcoin adoption or recognition are helping the cause and long term picture. You’ll find a few examples here, here and here. 

And from  that last link … 

“Wells Fargo and JPMorgan both recently filed for passive Bitcoin funds. Recently, Coinbase announced a partnership with one of the largest traditional banks in Japan, Mitsubishi UFJ (MUFG) Financial Group, which will offer its account holders exclusive onboarding to the exchange platform.”

Seeking Alpha offered that we might see bitcoin ETFs in the U.S. by October. 

From that post … 

“VanEck and ProShares’ rapid withdrawal of proposals for Ethereum futures ETFs is a good sign for a potential Bitcoin futures ETF, given the SEC has allowed that filing to remain active. A launch could come as soon as October, and we believe the SEC should permit several at once to avoid handing out a first-mover advantage.”

That could certainly be a massive development on the adoption front. That said, it would be more advantageous to have U.S. ETFs that hold bitcoin (not futures contracts) as more money would be fighting for actual bitcoin, adding to the scarcity of the asset. 

And, as always, the narrative can change in a heartbeat. Once again, interested investors might treat it like any other portfolio asset. For me, it is digital gold. 

You might have an asset allocation target (3% to 5%, for example) and rebalance as necessary. 

No-fee trades at National Bank’s discount brokerage

It is encouraging to see some fee disruption in the discount brokerage space. National Bank has introduced $0 commission stock trades for their National Bank Direct Brokerage. It is the first bank-owned brokerage to cut trading fees to zero. (Since 2017, National Bank’s brokerage has offered no-fee trades for Canadian and U.S.-listed ETFs.)

As a primer on the brokerage space in Canada, have a read of MoneySense’s annual the Best online brokers in Canada package. You’ll see that National Bank Direct Brokerage was ranked number two overall in Canada, right behind Questrade, even before the fee cut. 

The bank says this fee reduction was years in the making. In the U.S., discount brokerages such as Schwab and TD have offered free trades since 2019. In Canada, Wealthsimple Trade offers no-commission trades for Canadian stocks and ETFs. (But keep in mind that Wealthsimple Trade is a trading app, and not a discount brokerage.)

National Bank offers that they don’t mind taking the initial fee hit, and plans to make up for it by attracting new cost-conscious clients. 

This from Martin Gagnon, the bank’s executive vice-president of wealth management, from the above Advisor’s Edge link… 

“‘The objective is very simple,’ said Gagnon. “‘t’s to increase our client base. We know exactly how many clients we need to have to make up the loss in revenues. And we currently estimate that we will achieve this as revenue accretion in fiscal 2022.’”

The question is: How successful will they be in attracting new customers? Many Canadian investors are not all that price-sensitive (or aware) at all. Although low-fee ETFs are available, mutual fund assets continue to march toward the $2-trillion range. 

That said, we know that younger investors are embracing Wealthsimple Trade in a big way. 

Perhaps it is fair to suggest the old money is staying put at their current brokerage, while younger self-directed investors might be drawn to a discount brokerage with free trades. 

Keep in mind that brokerages still make money after they cut commission fees. From Surviscor’s Glenn Lacoste in the MoneySense online brokerage rankings… 

“No doubt, $0 commissions are attractive. Who doesn’t want free transactions? But before you rush to move your money to a no-commission firm, ask yourself: “Why is this firm, which is clearly in the marketplace to make money, willing to absorb all of my costs?” After all, even a not-for-profit business still has operating costs to cover, including wages, systems upkeep and general operations. 

“Simply put, if there are no commission charges, then the brokerage is earning fees elsewhere. Perhaps it’s through inflated foreign exchange rates, limited or delayed market data, or orderflow partners (where the firm gets paid for each order they send to a partner for processing).” 

Do your research and ensure first the service offered matches your needs. 

Stock watch: Apple’s 10 years under Tim Cook

From inception and for many decades, it was known as Steve Jobs’ company. Jobs was the co-founder and the driving force behind Apple’s meteoric rise to one of the most valuable and interesting companies on earth. 

Jobs was a prolific modern-day inventor who, together with Steve Wozniak, pioneered the personal computer. Jobs and Apple then revolutionized how we listen to and access music. The iPhone changed how we communicate, and share photos and videos. The evolution continues; Jobs charted the course and a technological journey that shapes our lives to this day.   

For Jobs, design and functionality became one. How a product looked, how it felt in your hands, and what the product could do, were shaped into one seamless experience. 

Jobs is quoted as saying… 

“I want to put a ding into the universe.” 

Mission accomplished. 

When Jobs died in October of 2011, there were fears that Apple would stall without their heart and soul and lead thinker. An Apple motto was once “Think different.” 

Who would then lead and think different? 

Tim Cook took on that monumental challenge as the CEO of Apple, following the man who put a ding in the universe. 

This CNBC post looks at the ensuing 10 years of Apple’s success under Cook. And it is an incredible success story. In fact, Cook has driven the company to even greater financial heights. Apple continues to develop many new and fast-growing enterprises. And the market has taken notice, making Apple the most valuable publicly traded company on the planet. 

From that CNBC post, you’ll see that quarterly revenues have increased from just over $27 billion to almost $87 billion in Cook’s decade.

You also find a chart that demonstrates the drastic outperformance of Apple’s stock price compared to the S&P 500. Framing that… 

“Investors would be happy if they bought Apple on Cook’s first day. An investment of $1,000 in Apple stock on Aug. 24, 2011, would be worth more than $16,866 as of Monday, an over 32% annual rate of return if they reinvested all dividends. The S&P 500 only returned just more than 16% annually over the same period.”

I bought Apple as one of my two U.S. growth picks (the other being BlackRock) in 2014. The annual rate of return from that period is in line with that 32%. Nothing short of incredible. Happy? Yes. 

Jobs left behind a culture and mission that allowed Cook to more or less stay the course. 

“‘From my point of view, Steve —his spirit will always be the DNA of the company,’ Cook said. ‘He embodied who we are. It was his vision that Apple should make the best products, and it was his vision that they should enrich people’s lives. Lots of other things will change with Apple, but that will never change.’”

I’ve often commented that a lack of massive disruption in the sector might provide a greater moat for Apple. There has been no game-changer arrive to topple the iPhone or iMac or iPad Apple cart. 

The space, and Apple, deliver incremental improvements in technology and experience, but nothing really earth shattering. Users are more than happy to continually pay up for new and improved in the tech space. Many want the latest and the greatest. 

Perhaps there is less risk when there is less disruption. And Apple can continue to use the strong brand and brain power to nose its way into new industries and product lines: think self-driving cars, payment systems (Apple Pay) and more. 

That said, Apple might be ripe for the picking with any product line. In the tech space, disruption can happen at an incredible pace and you don’t see it coming. 

With a high-flying stock, we might not get too comfortable and embrace a “never sell” mentality. For a stock like Apple, the dividend yield is low (0.59%); to access that value at some point, you will likely have to sell shares. I have sold shares in the past to help fund summer trips—I call them my homemade Apple dividends. And you’ll have to ignore that seller’s regret; $3,000 of Apple stock I sold in late 2018 would now offer a value of $8000. C’est la vie. 

I haven’t sold any Apple shares in a few years, I’ve let the orchard replenish, and then some. But I hope to sell more and invite more seller’s regret over the next few years. 

Many investors have target allocations. Perhaps they don’t want a single stock to be more than 5% of the portfolio. Trimming a high flyer is part of normal portfolio rebalancing. 

Here’s a case where an investor had too much in Apple stock and it created quite the financial planning headache. 

Still, most of us would offer that is a good problem to have. 

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge.  

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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