JMRD Market Observer for August 25th, 2017 – Canadian Banks

In This Week’s JMRD Market Observer



  • Canadian Banks start reporting Q3/17 results

  • Diversified & Real Estate Income Equities (Thematic Research) – Calendar Q2 2017 Reporting Recap

  • NBF Forex Update – September

  • JMRD Waterloo Office is Moving

  • JMRD Basket Corner

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports



Canadian Banks start reporting Q3/17 results


This week, Royal Bank of Canada and Canadian Imperial Bank of Commerce kicked off the Q3-2017 reporting season for the Canadian Banks. The sector has been facing concerns related to the Vancouver/Toronto housing bubble, household indebtedness and, ultimately, credit quality. Against this backdrop, there have been a surprising low level of loans losses reported by the banks. During Q2/17, four of the Big-6 banks reported lower than forecast Provision for Credit Losses, and half reported Canadian Personal & Commercial loan losses that declined on a Y/Y basis. With benign/improving credit metrics visible from credit card securitization data, low unemployment levels (and improving in Alberta) and declining bankruptcy rates in Canada, NBF’s bank analyst Gabriel Dechaine believes this trend can continue which would allow banks to meet or beat NBF’s forecasts.


The other key focus for the quarter is the recent and sudden shift by the Bank of Canada on interest rates. On July 12th, the Bank of Canada increased rates by 25 basis points followed by Big-6 all raising their prime lending rates by 25 bps. Naturally, investors’ questions were directed towards the financial impact of this hike, and potentially another this fall. Unfortunately, Big-6 disclosure is not at all helpful to gauge earnings sensitivity to higher rates. Considering the high proportion of fixed rate mortgage loans on their balance sheets and their preference to match fund, we believe EPS sensitivity to a single rate hike is fairly small (i.e., around 1% of EPS annualized). Similarly, investors became worried about the impact on financing costs, since affordability has benefited from low rates. Although there are many variables to consider, mortgage servicing does not appear to be an issue.


Royal Bank and TD Bank are the two banks held in JMRD’s DIG Basket. Royal’s results on Wednesday reflected resilience in the company’s Canadian P&C business. The positive growth was achieved, despite the bank breaking its 6-consecutive quarterly streak of positive operating leverage. Negative 1.4% operating leverage was weighed down by expense growth of nearly 7%, caused partially by severance costs (see attached report) and elevated initiative spending (e.g., IT initiatives). Assuming normalization of expense growth, moderately improving margins and stable credit performance, NBF believes the bank could accelerate growth from current levels. Royal Bank currently yields 3.9% and announced a 5% dividend increase this week, as expected.


See RBC article



Diversified & Real Estate Income Equities (Thematic Research) – Calendar Q2 2017 Reporting Recap


With calendar Q2 reporting behind us we highlight which equities in our diversified coverage list: 1) had the best/worst earnings momentum in the quarter; 2) offer the most compelling yield opportunities; 3) provide the most attractive relative valuation; and from this, 4) are the best positioned to Outperform going forward.


The most compelling opportunities for income-oriented investors include:

Crius Energy: 9.0% yield / 49% 2018e DCPU payout.

American Hotels: 9.2% yield / 78% 2018e AFFO payout.

Alaris Royalty: 7.3% yield / 77% 2018e DCPS payout.

Exchange Income: 7.0% yield / 55% 2018e DCPS payout.

Chemtrade Logistics: 6.6% yield / 59% 2018e DCPU payout.


Our top picks at current prices are:

Parkland Fuels: Bullish on accretion from CST/Chevron transformational acquisitions.

Enercare: Service Experts continues to integrate well; Solid traction in tuck-in M&A.

Tricon Capital: Sum-of-parts NAV valuation suggests shares are undervalued.

Crius Energy: Q2 setback believed manageable; too inexpensive to overlook.

Alaris Royalty, American Hotels, Boyd Group, Chemtrade, Crown Capital, Exchange Income, Liquor Stores, Morneau Shepell, New Flyer, SmartREIT and WPT Industrial all well-positioned to move higher.


Of note, Boyd Groud, Crius Energy, Enercare, Parkland Fuels and New Flyer are held in JMRD’s All-Cap Growth Basket


See the full article



NBF Forex Update –September 2017


A stronger-than-expected first half of the year prompts us to upgrade our Canadian GDP growth forecast for 2017 to 2.9%. Solid growth is being complemented by a healthy labour market, the latter creating jobs in numbers not seen in 7 years. That, coupled with the housing wealth effect ─ consumer credit growth is surging thanks in part to home equity lines of credit ─ is boosting consumption. We have also raised our call for 2018 growth from 2.0% to 2.5% to reflect provincial fiscal stimulus in British Columbia but also in Ontario and Quebec ahead of elections in the latter two provinces. The improving outlook and growing financial stability risks associated with housing and household debt arguably take precedence over the problem of low inflation, and hence warrant tighter monetary policy from the Bank of Canada.


See the full article



JMRD Waterloo Office is Moving


We wanted to inform you that our Waterloo office is moving – but not very far.  The address is the same at 180 King Street South in Waterloo.  However, we’re moving from the 3rd floor to the newly renovated 7th floor.  If you’re in the area, stop in and check out our new digs!



JMRD Basket Corner


All Cap Basket

Savaria (SIS) – Savaria announced on Friday that it has entered into an agreement to acquire the assets of Visilift, LLC for $5 million (USD), with the potential for an additional payment of US$3 million by surpassing certain performance hurdles over a three year period. Incremental sales of US$3 million are expected in 2018 and US$10 million in 2019 with estimated EBITDA margins of approximately 20%. Visilift’s product offering is an in-home elevator that does not require a pit or machine room, and can be installed without remodeling, as the assembly is modular. The addition to Savaria’s product line further fleshes out Savaria’s stair lift and home elevator accessibility options


U.S. Growth Basket


Broadcom (AVGO) – Broadcom Tops Q3 Earnings on Robust Top-Line Growth



Reads of the Week


  • Hot Charts: Canada: Minimum wage in Ontario to test key threshold Canada has one of the highest employment rate for youth (people aged 15-24) in the advanced world: 57% vs only 41% for the OECD average. According to Statistics Canada, 61% of all minimum wage employees in our country are aged 15 to 24.[1] Youth thus stand to be the most impacted when there are large increases in the minimum wage. Quebec is a case in point. In the mid-1970s, the province opted to raise its minimum wage to 54% of average hourly earnings (AHE) in manufacturing. This ratio proved to be counterproductive as youth employment conditions soon began to deteriorate: the jobless rate in Quebec had surged 6 percentage points to 19.5% by 1977 while Ontario’s remained near 13%. It was later established that in Quebec’s case, a ratio of minimum-wage-to-AHE of 48% should not be breached in order to maintain optimal employment conditions. As today’s Hot Chart shows, it is interesting to note that Ontario’s plan to raise its minimum wage from $11.40 currently to $14/hour by January 2018 would propel the province’s ratio of minimum wage-to-AHE in manufacturing to 54%. Will the outcome in Ontario be different from that in Quebec in the 1970s? Time will tell. The youth unemployment rate currently stands at 10.2% in Quebec and at 11.9% in Ontario. See the full article











Economic Reports


Monday August 28th – None

Tuesday August 29th– Consumer confidence index (US)

Wednesday August 30th – MBA Mortgage applications (US)

Thursday August 31st –   Real GDP (CAD) Pending Home Sales (US)

Friday September 1st – None



Earnings Reports


Monday August 28th – None

Tuesday August 29thBank of Montreal, Bank of Nova Scotia

Wednesday August 30th – National Bank of Canada

Thursday August 31st –   Toronto-Dominion Bank, Lululemon Athletica Ltd

Friday September 1st – None



Enjoy the weekend!


By | 2017-08-28T13:31:10+00:00 August 25th, 2017|JMRD Updates|0 Comments

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