In this week's economic update, we take a step back from the broad market narrative and focus on the Canadian banks, which recently released their results. We share some of the broad takeaways from these results, as well as the importance of Canadian banks as part of our clients' portfolios.
This week, we also highlight the success of our annual International Women's Day event, hosted last Thursday at Cutten Fields. As part of this event, Elinesky Schuett Private Wealth was proud to arrange a $3,500 donation from the RBC Foundation to the She’s Got Game initiative.
We would also like to highlight our involvement in Black Tie Bingo, a fundraising gala in support of Guelph General Hospital held on Saturday March 4th. We are incredibly proud to support the foundation and we are glad to have helped this year's fundraising efforts.
Lastly, we'd like to invite you to participate in the final Inspirational Women luncheon of the year. Together with the Guelph Chamber of Commerce, we will be celebrating and hearing from Jessica Hirst (Founder and CEO) and Donna Hirst (Co-owner and CFO) of The Modern Bride.
Economic Update
Competing views within global markets
A tug of war has emerged this year in global markets. On one end, a view that tight financial conditions will eventually lead to a recession and equity market weakness. On the other side, the belief that a resilient economy will lead to stickier inflation and force central banks to raise rates more than expected, which could extend the weakness across asset classes we saw last year.
The latter view has been more prevalent of late given stronger economic data through the first few months of the year. We expect sentiment to oscillate from one view to the other over the months to come as data trends inevitably change. In time, we expect tight financial conditions to eventually weigh on economic activity.
Canadian banks results
This week, we take a step back from the broad market narrative and focus instead on the Canadian banks, which reported results recently. We often closely assess this group because it’s at the core of the financial and economic ecosystem, and can provide helpful information on the state of the consumer, businesses, and financial conditions. It also remains such a large part of the domestic equity market, and not surprisingly, an important part of the portfolios we manage for our clients. As usual, there were stock specific issues tied to each bank’s results this past quarter. However, there were a few broad takeaways.
Interest rate tailwinds may be fading
First, it appears the tailwinds of rising interest rates that had benefited the banks over the past year are set to fade to some degree as growth in net interest margin (the difference between interest revenue and interest expense) is expected to moderate as the year progresses.
Credit trends looking okay
Second, credit trends looked to be just fine this past quarter, with no real evidence of any deterioration. Moreover, while the banks are preparing for credit losses to eventually increase, they remain confident in the diversification of their loan books and don’t expect to see much in the way of stress.
Capital levels remain relatively solid
Finally, capital levels, which can be regarded as the armour on the balance sheets of the banks, remain relatively solid, which should reassure investors that the banks have the ability to withstand future credit losses.
Overall health remains good, but impacts of scrutiny and credit concerns linger
From our vantage point, the results and commentary from management teams confirm that the current backdrop and health of the overall consumer and businesses remains reasonably good. Nevertheless, the Canadian banks continue to trade well below their historical averages.
This suggests the market has some concerns. More specifically, there are two issues weighing on valuations. First, more scrutiny and pressure from government and regulators that has resulted in higher taxes and capital requirements. This has and may continue to limit the earnings power of the banks. Secondly, concerns over credit as a combination of much higher interest rates and an indebted Canadian consumer may eventually lead to a more challenging credit cycle.
Dividend yields and important role within portfolios
These concerns are already reflected in current bank stock valuations, although it wouldn’t be surprising to see some weakness in bank stocks once loan losses begin to accelerate. As always, the possibility exists that a downturn could be worse than expected.
In the meantime, the dividend yields of the banks continue to offer some refuge, with yields ranging anywhere from 4-5% on average. Those levels are not necessarily as compelling as they used to be relative to bonds. Nevertheless, they still represent a reasonably attractive source of income and as a result, we believe the Canadian banks will continue to play an important role inside our clients’ portfolios.
Post-Script: initial thoughts on Canadian banks after SVB failure
The pace at which SVB unraveled has raised some investor concerns on similar risks at other financial institutions, including Canadian banks. However, it is believed the failure of SVB was idiosyncratic and is unlikely to cause contagion across the broader financial system, especially after the sizable support provided by U.S. regulators over the weekend. It is also worth noting that SVB was not subject to same regulatory requirements as the larger banks, which meant that it could do whatever it wanted with its deposits that it couldn't lend out. Large Canadian banks are well-capitalized and liquid, and are subject to minimum liquidity coverage ratio (LCR) of 100%, which all banks exceed by a wide margin.
If you have more detailed questions or want to better understand the collapse of Silicon Valley Bank, RBC Global Asset Management has put together the following two resources for you. "Bank stresses bubble to the surface" was written by Eric Lascelles (Chief Economist at RBC Global Asset Management) and Daniel E. Chornous, CFA (Chief Investment Officer at RBC Global Asset Management) and goes into more detail as to why some regional US banks are under stress. The second document entitled "The collapse of Silicon Valley Bank" was released by RBC Global Asset Management and explains the events leading up to Silicon Valley Bank’s failure, and what it means for investors.
Bank stresses bubble to the surface - March 13th 2023
The collapse of Silicon Valley Bank - March 13th 2023
As always, please don't hesitate to contact us directly if you have any questions or concerns.
International Women's Day
This past Thursday, we hosted our annual International Women’s Day event at Cutten Fields in Guelph.
Celebrating this year’s theme of #EmbraceEquity, we had a record-setting attendance and the event was an enormous success. We heard from Scott McRoberts, Director of Athletics at the University of Guelph, who spoke about the ‘She’s Got Game’ initiative, which supports the Guelph Gryphons female athletics program, fostering gender equity and helping women and girls excel in sports. Elinesky Schuett Private Wealth was proud to arrange a $3,500 donation from the RBC Foundation to the She’s Got Game initiative.
The audience was then treated to the 1-on-1 discussion with Susan Frasson, President of Wood Development Group, and our own Karie Huisman. Both speakers shared some of the challenges they’ve faced as women in business and in all areas of life. Susan shared some great insights into her journey and the obstacles she’s faced, including fielding some thoughtful questions on what the future may look like for women leaders.
Feedback has been overwhelmingly positive – thank you to our guests, our team, and to everyone who came to celebrate gender equality and the achievements of women in our local community.
Black Tie Bingo
We were proud to be sponsors for Black Tie Bingo, a fundraising gala in support of Guelph General Hospital held on Saturday March 4th.
This year, over $450,000 was raised to support the hospital’s incredible surgical team and their ability to conquer the backlog of procedures – a record-breaking night! These donations will fund necessary equipment purchases and human resources needed to extend operating hours.
Thank you to all of the extremely generous donors from the event, who helped to bring this fundraising goal to life. We’re incredibly proud to support the Foundation of Guelph General Hospital, and we look forward to continuing to support the great work at the hospital!
Inspirational Women Event in May
On May 16th, the Guelph Chamber of Commerce will be hosting the final Inspirational Women luncheon of the year, where they will be celebrating Jessica Hirst (Founder and CEO) and Donna Hirst (Co-owner and CFO) of The Modern Bride. We are proud to be the presenting sponsor for these luncheons.
Jessica and Donna will be interviewed by our own Jennifer Goody-Brown about their journey as CEO and CFO, and about building a successful business as a mother and daughter duo.
If you're interested in attending, you can use the link below to register now!
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.