TD and Royal Bank’s Earnings Show That Canada’s Economy Is Still Safe

Toronto-Dominion Bank (TSX:TD) and Royal Bank of Canada (TSX:RY) recently put out their Q4 earnings. They were not bad.

| More on:
edit Businessman using calculator next to laptop

Image source: Getty Images.

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Bank Stocks

Piggy bank next to a financial report
Stocks for Beginners

Is It Finally the Right Time to Buy Bank Stocks?

Canadian bank stocks are some of the most secure investments out there, but of them all, this bank stock is…

Read more »

Bank Stocks

Down 11%, Should Investors Buy TD Stock Ahead of Earnings?

Sure, TD stock offers a deal at these prices. But is it worth the risk after the bank's anti-money-laundering investigation?

Read more »

Growing plant shoots on coins
Bank Stocks

RBC Stock: Rock Solid for Dividends and Growth

RBC (TSX:RY) stock has long been the biggest stock on the TSX, but there are many reasons the company should…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Bank Stocks

How to Use Your TFSA to Earn $4,750 in Annual Passive Income

Bank stocks like the Toronto-Dominion Bank (TSX:TD) can produce over $4,750 in a maxed out TFSA.

Read more »

Glass piggy bank
Dividend Stocks

Prediction: These 2 Canadian Bank Stocks Are Next in Line to Pop

These two Canadian banks are climbing, but still have so much more room to run. And with the highest dividend…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 2 Fabulous Stocks to Buy Now for Decades of Passive Income

Two blue-chip stocks from the banking and energy sectors are excellent sources of pension-like income.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Bank Stocks

Want to Be a TFSA Millionaire? The CRA Says ‘Watch Out’

Holding blue chip stocks like Royal Bank of Canada (TSX:RY) is preferable to trying to get rich trading options.

Read more »

Red siren flashing
Bank Stocks

Bargain Alert: I’ve Been Buying Dips in These Canadian Bank Stocks

Canadian bank stocks are great long-term options that can provide growth and income for decades. Here are two that trade…

Read more »