In 1982 I worked in the bad loans department of $BMO.CA. This was in the wake of the ultra-high interest rate war on inflation, when prime got up to 22.5%. My job was to call loans and put people out of business. In the fall of 1982, just before the bank's Oct. 31 year end...1/n
The Sr. V.P. for credit called us all together. "This" he said, "will be a kitchen-sink quarter. You are to recommend write-offs on any bad loans and fully provisions on any dubious loans. We are going to take massive reserves because it is bad politics to show big profits" 2/n
So that's what we did. Anything with the least taint of failure was labeled as bad, the bank took a big profit hit, and as the recovery took hold and rates quickly came down, many provisions were reversed. Why do I tell this story now? Because we all need to recognize...3/n
That the provisions the banks are taking this quarter are some combination of guesses, assumptions and straight out wild-ass guesses. You cannot tell much of anything from them and we have to look at bank earnings through a different lens this year. 4/n
What is important is the strength of balance sheets, the sustainability of dividends and the resilience of core operations including capital markets, wealth management and advisory services. From this point of view $BMO.CA looks the worst and $NA.CA the best. As for losses 5/n
We will have a better idea of the adequacy of the loan loss provisions a year or so from now. In the meantime go with the banks that have strong profits in non-lending activities. In this regard $BNS.CA $RY.CA and $NA.CA look pretty impressive so far. 6/n
I continue to think that big banks in Canada will not cut dividends, and most are quite attractive at today's prices. Our view is that if you measure from today, you are more likely to see a 20% upside on the banks than in sectors that have already moved up a lot, like big tech
