Ashley Redmond: I'm Ashley Redmond for Morningstar.ca and I am here with equity analyst Dan Werner who covers the big Canadian banks for us. Dan, thanks so much for joining me.
Dan Werner: Thanks for having me Ashley.
Redmond: Last month the banks reported their Q3 earnings. So, that means you've had some time to look at the numbers. How did the banks do in Q3?
Werner: Traditionally the third quarter is a pretty good quarter for the Canadian banks and that was reflected in this quarter's results. However, it was a little bit different this time. Usually the Canadian banks have seen the revenue and net income growth through balance sheet growth with increased loans, increased assets, and earning assets. This time I think it was a bit different. We saw more of the fee based type of businesses that contributed to the improved results largely through the wealth management area, as well as the capital markets area. So, as assets under management increased those fees have increased and the activity in the capital markets has led the way for the Canadian banks in terms of improved results.
Redmond: Okay. Any other drivers behind that performance?
Werner: Well, I think you can largely point to the financial markets. You look at the TSX and how well it has done this year. The trading revenues have been very strong and even with higher equity values; you have higher assets under management which results in higher fees because the fees are usually a percentage of the assets under management.
We've also seen good inflows into some of the banks' wealth management areas especially [with banks such as] Royal Bank. They had good net inflows and organic inflows. If you look at the capital market side you look at the how well the equity markets have done. Generally that’s the time when you get most of your advisory fees, your equity underwriting fees and with low interest rates that also spurs further debt underwriting fees. So, all in all it's those fee-based businesses that really drove the Canadian banks this last quarter.
Redmond: Which bank was the biggest surprise and which bank was the biggest let down?
Werner: I would say Royal Bank was probably the biggest surprise. It is known for its capital markets group and how large it is and how well it's done. But for the third quarter they had nearly double the net income from that segment compared to a year ago and that was a huge driver for them.
As far as the biggest disappointment I would point to Scotiabank, which was pretty tepid on most of its segments except for capital markets. I mean international was fairly flat and actually had higher provisions for losses. The Canadian growth was kind of flat in terms of revenue and net income. So, for me Scotia was the disappointment of the group.
Redmond: Okay. When you take a step back and look at the overall picture what was the main takeaway from this quarter?
Werner: I think the main takeaway is that revenue and net income growth that we've seen from the Canadian banks over the last few years has come down [slightly] and the things that are driving the improved results are fee-based businesses, wealth management and capital markets. Given how the financial markets have done I think that’s how we are going to finish up the year with strong results from those segments and slower revenue and growth on the balance sheet side.
Redmond: Anything specifically that you'll be looking for in Q4?
Werner: I think I'm going to be looking at how those fee-based businesses do. But I am also going to look at the balance sheet growth because in the last couple of quarters we've seen better balance sheet growth and loan growth through the commercial businesses rather than the residential businesses. And that may actually be a good thing for the bank. So we'll see where that loan growth comes from.
Redmond: Great thanks so much, Dan.
Werner: Thanks Ashley.
Redmond: For more on the big Canadian banks go to stocks page of Morningstar.ca.
