In this week’s economic update, we discuss the Canadian banks which are set to report quarterly results next week where expectations are justifiably high.
In addition to our featured economic commentary, we’ve included three additional resources for you, two of which feature Eric Lascelles, Chief Economist with RBC Global Asset Management, and one focused on dividends:
- Third wave update, outlook on inflation, commodity prices, housing and more
- The outlook on employment
- The power of dividends
Elinesky Schuett Speaker Series: Advance Care Planning Seminar, June 16. We are looking forward to hosting you at our next online event that will focus solely on Advance Care Planning. Event details and your RSVP link are below.
The Elinesky Schuett Riders are back! In 2020, our team participated in the Tour de Guelph. We’ll be back on the road again in June, but we thought you might like to check out our video from 2020 if you missed it the first time! The link is below.
As always, we end our weekly blog post with a few good news stories from in and around our community.
Your economic update
Overall, markets were unchanged or modestly higher over the past week. Some of the inflation-fueled concerns subsided in recent days, helping to revive the high growth parts of the market that have borne the brunt of the latest bouts of pressure. Canadian investors are likely to turn their attention to the financial sector over the next week, with the banks set to report quarterly results. Earnings should be strong, but the question is whether they will be good enough to meet the elevated expectations. Regardless, the intermediate-term outlook remains positive for the sector, which we discuss below. We also provide a brief update on a much improved COVID-19 situation in this country.
Canada experienced one of its largest declines in new daily infections this past week. The country’s seven-day average rate of new daily infections stands at 5,000, versus 6,700 from the same period a week ago. Nearly all regions across the country experienced meaningful improvement, including Alberta where the average rate of new daily infections fell by 40 percent in the past week alone. Manitoba remains the one province that has yet to show significant declines, though its figures did not increase over the past week which could mark an important point for the province going forward. Many provinces are now preparing to ease restrictions in the weeks to come, which comes as a welcome relief to many and should bolster the economic tailwinds going forward.
Canadian banks expected to report good results
The Canadian banks have performed well year-to-date, with share prices rising by roughly 20 percent already. That group is now well above where it traded before the pandemic began. The strong performance in recent months has raised expectations with respect to the strength of future earnings and dividend growth. Nevertheless, there are a host of reasons to remain optimistic.
As the Canadian banks benefit from a better operating environment relative to the year ago period, earnings growth this quarter is expected to be up by well over 100 percent year-over-year. Last year, banks were aggressively building reserves to prepare for anticipated loan defaults. Those credit losses have yet to materialize as government programs and other measures aimed at helping households and businesses limited the economic damage. While conditions remain far from normal, the banks are no longer building reserves and their provisions for credit losses are now declining year-over-year. That trend should continue, with the banks ultimately releasing reserves once economic uncertainty has faded from the outlook, which could add a further tailwind to future earnings growth.
Most banks have capital markets franchises and wealth management operations that could deliver strong results in the near-term. They may benefit from a favourable market backdrop that has been characterized by rising asset prices, high levels of capital raising, and volatility, particularly in the bond market that may drive strong trading results.
One key source of profitability that is expected to remain challenged for now is net interest margins. This source of earnings is generated from the spread earned between net interest revenue, typically from loans to customers, and net interest expense, or the interest paid to customers who deposit funds at a bank. Currently, deposits remain unusually elevated, driven by a combination of financial assistance programs and low spending given large swaths of the economy remain partially closed. The latter issue has also resulted in relatively weak loan demand, and net interest margins are unlikely to improve in an environment where deposits materially exceed loan levels. However, assuming Canada continues to see an improving trend with respect to the virus and the easing of restrictive lockdowns, it may just be a matter of time before this important source of earnings begins to finally accelerate.
On the dividend front, not much may change in the near-term. The Office of the Superintendent of Financial Institutions (OFSI), Canada’s banking regulator, implemented restrictions last year on share repurchases and dividend increases for the sector. It has reiterated that stance in recent months, and is expected to provide a more official update next month. It may want to wait for a more sustainable economic recovery to unfold before permitting the banks to deploy their capital towards shareholder-friendly initiatives. With the banks targeting dividend pay-out ratios of 40-50 percent of earnings, there is potential for dividend increases over the next couple of years once the restrictions have been lifted.
Despite the strong run the Canadian banks have had year-to-date, the valuations relative to measures such as book value and forward earnings are not excessive. And while investors may have to wait for their dividends to be increased, the patience may be rewarded given the strong earnings growth and operating environment that appears poised for continued improvement.
Third wave update, outlook on inflation, commodity prices, housing and more
In this video, RBC Global Asset Management’s Chief Economist, Eric Lascelles shares his inflation outlook and discusses corporate pricing power and the risk of a commodity 'supercycle'. He also comments on the latest virus developments and housing affordability in North America.
Watch the video or read the transcript online: Third wave update, outlook on inflation, commodity prices, housing and more
[17 minutes, 1 second] Recorded May 18, 2021
The outlook on employment
Listen to the podcast online: The outlook on employment
[10 minutes, 10 seconds] Recorded May 7, 2021
The power of dividends
Dividend-paying companies represent a significant portion of the Canadian equity market and are typically well-established, soundly managed companies with stable businesses. Dividends can also be an important part of a portfolio’s total return, helping to offset losses in times of market declines, while boosting portfolio returns when markets are rising.
You can read the full article online: The power of dividends
Are you making health care decisions for aging parents, an ill spouse or family member? If you were in the hospital, too ill or hurt to speak for yourself, do you know who would make your health care decisions for you?
Please join us for an informative session to find out what Advance Care Planning is and why it should matter to you! During this 45 minute presentation, Dale Gellatly, Volunteer Engagement Coordinator with Hospice Wellington, will focus on the following:
- Advance Care Planning
- Substitute Decision Making
- Powers of Attorney
- Health Care Consent
Kindly RSVP by Monday, June 14, 2021
2021 Tour de Guelph Community Ride
The Elinesky Schuett Private Wealth Management team will be back on our bikes and raising funds for the Foundation of Guelph General Hospital in the 2021 Tour de Guelph Community Ride. This is the second year that our team has gathered (socially distanced, of course) to participate in this fantastic community event. Keep an eye out for us… we’ll be on the road July 23!
In addition to riding in the Tour de Guelph, we are honoured to be involved with this extraordinary community event as the presenting sponsor of the 2021 Online Rider Photo Album hosted on Guelph Today.
Tour de Guelph supports the Guelph General Hospital and many other local charities through the Rotary Clubs of Guelph South and Guelph Trillium. This year, the Guelph General Hospital’s portion of the funds raised from the event will directly support its $34-million Together, We Care fundraising campaign, helping the Hospital invest in new patient care equipment and technology by helping to fund a new MRI machine.
Visit the Tour de Guelph website for more information.
Each week, we like to end our posts with a few good news stories from in and around the community. We hope that they brighten your day!
- Rockwood chef donates heat-and-eat meals back to EWCS food banks
- The woman behind Erin’s seed library offers inspiration for the garden
- Gallery: Spring has sprung in Elora and Fergus (14 photos)
- Guelph artist shows support for health-care workers
- Grade 2 siblings fundraise money for Guelph General Hospital
- Local wrestler breaking barriers for females in sport
- Guelph and District Multicultural Festival launches radio show on CFRU
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or email@example.com.