'A pretty greedy time' as profits soar for Canadian banks: Don Pittis

The profits announced by Canada's banks over the last weekhave been nothing less than astounding.

Whether thebanks can keep on doing well matters to all Canadians, but are they being greedy?

Yesterday the Bank of Montreal saidit had made about $1.5 billionin three months.

That may be hard to put in context until you hear that it is an increase in profit of nearly 40 per centfrom the same period last year and dramatically higher than stock watchers had been expecting.

Not all the banks have done as well as BMO this time.The Royal Bank'sprofits were up 24 per cent at $3 billion. CIBCprofitswere up 13 per cent. TD releases its numbers tomorrow.

The big banks tend to take turns being the biggest winner in any given year, and some take brief stumbles,but year after year Canadian banks have beenpersistent money machines.

After such a long period of success, it is reasonable to ask how long the banking boom can last.

What's good for the banks ...

There are a number of reasons why it matters.

RBC is the largest component in nearlyevery Canadian retirementfund and mutual fund portfolio.

A glance at the Canadian stocks in the Canada Pension Plan portfolioshow the banks asthe biggest holdings.

If personal greed isn't enough to convince you, there are at least two more reasons to wish the banks well. One is that like mining, banking is one of Canada's globally acknowledged successes.

Our banks have stakes in other countries around the world, from RBC'sbanker to the starsserving the international one per cent, to Scotia's presencein the Caribbean and LatinAmerica. Rather than softwood or oil or copper, they export services.

The other reason to be happy about the success of banks is that theyarean indicator of Canada's economic health. If banking is sick, watch out for your job.

There are some good reasons why Canadian banking is ready to keep booming, including an expected rise in interest rates. In general, retail banks do well whenrates go up.

"Absolutely, because banks' business model is to havethe interest rate difference between the deposit rateand the lending rate, and when the overall interest rateis higher there is just more room to make a profit," says Kai Li, finance professor at UBC's Sauder School of business.

Selling banks short

Li saysrecent reports that international investors were shorting Canadian banks the financial equivalent of betting the shares would fall were mostly based on fears of non-performing loans in Canada's oil and gas industry as oil prices crashed from $100 USin 2014to less than$30 a barrel last year.

Now that oil prices are back above$50, the danger of wholesale defaults onhuge portfolios of energy loans no longer hangs over the banks, says Li.

A remaininghazard for banks' finances, says Li, is "the risk on their mortgage portfolio," something the banksseem to be taking seriously.

This month BMO issued a stern warning of a bubble inToronto area real estate. In an interview with the Financial Post, Royal Bank CEO Dave McKayadded his own warning, calling the market unsustainable and in need of regulation.

Because of CMHCmortgage insurance, the banks aresheltered by the taxpayers from the brunt of any property decline, but as we saw in the U.S., when a property bubble pops, the entire economy goes sour.

Sofia Johan sold her property in the United States just before the 2007 bubble popped and bought here in Canada. Now abanking regulation expertat York University'sSchulichSchool of Business, Johan says such a meltdown would hit the Canadian economy hard.

However, she thinks Canadian banks have the depth and diversity to withstand a property crash better than the U.S. banks did.

Risk and greed

In the near term, Johan says, Canadian banks stand to benefit financially as the Trump administration cuts banking regulation, "if they act in the correct manner, i.e., not taking on too much risk."

She worries cuts to regulation could start a new financialfrenzy that could end badly. That would be a risk for Canadian banks even if they don't participate in the worst excesses.

Contrarianmarket watcher BenjGallander, president of Contra the Heard, says we have returned to "apretty greedy time" in banking right now.

Speaking to Peter Armstrong last night on the CBC business show On The Money,Gallander said it was unethicalfor banks to be laying off workerswhenthey are makingstaggeringprofits.

"They should be loyal to their employees," he said.

Big Canadian bank earnings

8 years ago

Duration 3:47

Benj Gallander, co-founder of Contra the Heard Investment Letter, weighs in

And Gallanderwarns that despite many good years, banks must not let themselves be fooled into believingthat good times last forever.

"When they are making so much money, I think what they should be looking to do is pay down some of their debt so that when the hard times really hit, things will be more stable."

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