Toronto-Dominion Bank (TSX:TD) and Royal Bank of Canada (TSX:RY) recently released their fiscal fourth quarter (Q4) and full-year 2023 earnings. The results were quite good in Royal Bank’s case and so-so in TD Bank’s case. In Q4, Royal Bank beat on earnings, both reported and adjusted. TD Bank missed on both fronts, with a large decline in GAAP net income and a small decline in adjusted net income.
“GAAP” means official accounting rules. TD’s earnings declined badly when calculated by these rules but less so when accounted by the rules TD’s executives think best reflect economic reality. Some people think adjusted earnings are unreliable, but in the case of TD’s Q4 release, they simply “smooth out” the effect of a big windfall in the year-ago quarter.
Both TD and Royal Bank did well on the revenue front. As far as the economy is concerned, this is the main metric that investors want to look at. Although Canada’s banks are facing some issues with fines and deals not being approved, that is mainly a concern for bank shareholders. For Canadians as a whole, it’s their revenue and loan loss provisions that matter — I will explore those in detail in this article.
What TD and Royal Bank did in Q4
TD Bank delivered the following metrics in the fourth quarter:
TD Bank
- $13.15 billion in revenue, up 7.5%
- $390 million in loan-loss provisions (PCLs), up $160 million
Royal Bank
- $13.03 billion in revenue, up 3.6%
- $720 million in PCLs, up $381 million
Just a note on Royal Bank’s PCLs: you might note that my figure here differs from the one at the top of the Q4/fiscal 2023 earnings press release. That’s because “PCL” refers to the increase in an account called “allowance for credit losses”; thus, the quarterly amount is different from the annual amount.
The large increases in PCLs suggest that TD and Royal Bank see more defaults on the horizon. If they are correct, then that means the economy will be in rough shape, and defaults will increase. It might sound like that goes against my whole idea that the economy is in fair shape, but remember that banks figure conservatively with these things.
In 2020, PCLs went to extreme highs, yet the expected defaults never materialized. Actual defaults at TD and Royal Bank are at an acceptable level. So, based on the data that we are certain about, the economy is in decent shape.
Basically, the economy is in decent shape
TD and Royal Bank’s earnings did not contain any major red flags for the economy. The increase in PCLs may have appeared alarming, but remember, Canadian banks tend to play it safe with provisioning. U.S. banks sometimes don’t do enough provisioning, but Canada’s financial services culture is a little different than that of south of the border. None of the Big Six banks has ever been at risk of failure in their 150 years of history. To be sure, TD and Royal Bank have their issues. TD, in particular, is suffering from fines and fees related to the First Horizon deal terminating. On the whole, though, the banks’ results speak to a healthy economy.
