Published by Harvest Exchange Traded Funds (managed by Harvest Portfolios Group Inc.)

The business cycle may be getting long in the tooth, but after a decade of expansion, times have never been better for Canada’s big banks.

The Big Six are a good proxy for the national economic temperature and their latest results indicate that the economy is strong in spite of worries about NAFTA, global trade and high consumer debt.

For the last decade, falling interest rates have squeezed bank margins, but they have all managed to cut costs, increase profitability and continue to boost dividends. Looking ahead, the housing market, which they finance through builders and homebuyers, is stable. Their diversification outside of Canada is paying off.  

The Big Six earned $11.6-billion in the three months that ended July 31, with five of the six surpassing expectations for earnings per share. Only Bank of Nova Scotia fell short (by one cent) but here BNS is working through a handful of deals in Latin America and elsewhere announced in the last nine months.

Banks are a key part of the Harvest Banks & Buildings Income ETF (TSX: HCBB). The ETF had 28.6 % of its holdings in Canada’s five largest banks as of Aug. 31, 2018.  The fund aims to provide a monthly income and the opportunity for capital appreciation. It has 60% of its holdings in financials and  33% in real estate.  

Even though the Bank of Canada held off on increasing interest rates at its Sept. 5 meeting, the direction for rates is higher. That means net interest income, or the difference between what a bank pays for deposits and what it makes on loans, is rising.

The banks have entered a phase where rising rates are boosting profitability. A small expansion in profit margins has a far greater impact on profits.  Globe & Mail columnist David Berman noted in a recent column that a margin expansion of two basis points (there are 100 basis points in 1 percentage point) would increase bank profits up by an average of 1.4 percent on a per-share basis.

It would seem that for the banks, better things lie ahead. -AM

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