Slow and Steady Keeps You in the Race

By David Dittman • March 30, 2012 • Canadian Edge Weekly

Statistics Canada reported Friday morning that gross domestic product (GDP) north of the border grew by 0.1 percent in January. GDP expanded by a revised 0.5 percent in December, better than a prior figure of 0.4 percent. January growth was basically in line with the analysts’ consensus forecast. According to StatsCan, “Gains in manufacturing were partly offset by a decline in oil and gas extraction.”

Manufacturing grew for the fifth straight month, posting a 0.7 percent expansion. Durable goods production was up 0.8 percent on increased output in fabricated metal products, transportation equipment and wood products. Primary metal manufacturing declined in part because of a workers’ strike at an aluminum smelter in Quebec. Non-durable goods manufacturing was up 0.6 percent on strong chemical and food production. Paper and tobacco manufacturing decreased.

Oil and gas extraction declined 0.9 percent, as a notable decrease in natural gas extraction outweighed the gain in crude petroleum production. Storage of natural gas increased significantly in December and January. Support activities for mining and oil and gas extraction rose 1.8 percent, as rigging services activity was much stronger. Mining excluding oil and gas extraction grew 0.4 percent because of higher coal output.

Here’s a breakdown of other sectors.

Finance and insurance grew by 0.4 percent, mainly as a result of an increase in management activity for mutual funds, residential mortgages and business loans. The output of insurance carriers was also up.

Wholesale trade increased 0.3 percent on strong sales of petroleum products, motor vehicles and farm products.

Retail trade was unchanged in January, as gains for car dealers, auto-parts sellers and general merchandise stores, including department stores, were offset by declines in building materials stores, food and beverage stores, and electronics and appliances stores. Excluding new cars retail trade declined 0.5 percent.

Construction contracted by 0.1 percent, as weakening residential building construction more than offset rising non-residential building construction. After four consecutive monthly increases the output of real estate agents and brokers declined 3.1 percent, as home resale activity tapered.

Utilities grew by 1.1 percent, as demand for electricity increased following three consecutive declines, which were basically about unseasonably warm weather.

Tourism-related industries such as accommodation, food services and air transportation expanded, reflecting an increase in the number of overnight travelers to Canada.

The public sector–education, health and public administration–grew by 0.1 percent. Forestry and logging as well as the arts, entertainment and recreation all declined marginally.

These numbers won’t set the world on fire. In fact the 1.2 percent annualized pace of GDP growth is a far cry from the assumptions underpinning Finance Minister Jim Flaherty’s annual budget, which was released Thursday. Mr. Flaherty’s budget forecasts 2.1 percent growth for fiscal 2012, 2.4 percent for 2013.

The actual rate of Canada’s growth will critical as it sets out to erase its CAD24.9 billion federal deficit by 2015-16. The path will be longer and tougher if expansion is along the lines of January rather than those hoped for by Mr. Flaherty.

But at any rate this plank of Canada’s fundamental story–government finances–remains relatively solid.

The Big Six, Part Two

Earnings season for Canada’s Big Six banks concluded with Bank of Nova Scotia (TSX: BNS, NYSE: BNS) and Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) reporting solid results. And although headlines from major media outlets, commentary from professional skeptics and even cautious statements from policymakers continue to suggest some sort of looming disaster, Canadians, though burdened by it like most of the rest of the Western world, continue to manage their debt load much better than their developed-world peers.

Consumers are buying on credit, but they’re also paying off their balances. These facts are probably the most important of a long-term variety to emerge from Big Six reporting season.

Scotiabank became the third of the Big Six to boost its dividend as a consequence of fiscal 2012 first-quarter (ended Jan. 31, 2012) results, as acquisitions and better trading results drove a 7 percent increase in net income. The bank, No. 3 in Canada in terms of assets, raised its quarter payout 6 percent to CAD0.55 per share.

Low interest rates continue to drive demand for home mortgages, though the rate of growth on this front has abated. Better market conditions made quarter-over-quarter comparisons look good, and the takeover of DundeeWealth led to higher fee and commission revenue for Scotia’s wealth management segment.

The most international of Canada’s Big Six, Scotiabank reported that first-quarter revenue grew by 11 percent to CAD4.72 billion, with acquisitions accounting for more than half the increase. Loan-loss provisions fell 3.6 percent to CAD265 million.

Net income was CAD1.44 billion (CAD1.20 per share), up from CAD1.25 billion (CAD1.08 per share) in the first quarter of fiscal 2011. Cash earnings were CAD1.15 per share, in line with analysts’ consensus estimate.

Operating leverage was positive at 2 percent, which basically means revenue outstripped the cost of doing business; Scotiabank’s productivity ratio–expenses as a percentage of revenue–declined to 53.5 percent from 57.9 percent in the fourth quarter of fiscal 2011.

Traditional domestic banking profit was up 5 percent year over year and 17 percent quarter over quarter to a company record CAD475 million. Global wealth management net income surged 21 percent because of DundeeWealth. Profit for the former Scotia Capital unit declined 7 percent year over year to CAD311 million. Sequentially, however, this represents growth of 17 percent.

Net income from international banking was up 9 percent to CAD391 million, as Scotiabank completed the acquisition of a majority stake in Colombia’s Banco Colpatria. Scotia’s international footprint, which already covers parts of Central America, South America and Asia, will expand to include China with the closing of the purchase of the Bank of Guangzhou in 2012.

CIBC, Canada’s largest credit-card issuer, posted fiscal first-quarter net income of CAD835 million (CAD1.93 per share), up 9 percent from the first quarter of fiscal 2011. Cash earnings were CAD1.97 per share, ahead of analysts’ consensus forecast of CAD1.93, as revenue was up 2 percent to CAD3.2 billion.

CIBC–the only one of the Big Six to do so–increased its provisions for credit losses by 19 percent to CAD338 million, citing higher write-offs in its MasterCard portfolio due to the Christmas holiday and travel season. Management said during a conference call to discuss results that provisions will be down in the second quarter of fiscal 2012.

Retail and business banking profit was CAD567 million, up 5 percent year over year but down 5 percent quarter over quarter. Wealth management net income was CAD100 million, up from CAD66 million, while wholesale banking earnings were CAD133 million, down from CAD140 million.

The Roundup

Here it is, the last trading day of the first quarter, and we can now say, as of this week, that fourth-quarter and full-year 2011 earnings reporting season is over, just in time for the start of the second quarter of 2012. What we’re primarily focused on at this stage is management guidance for 2012, seeing as how we’re already 25 percent of the way through the year.

The good news is not only were numbers for recently concluded reporting periods solid and supportive of current and future dividends. But management teams in the main are comfortable with where their respective companies stand with respect to the myriad challenges facing them individually as well as those more general problems plaguing the global economy.

Here’s where to find summaries and analysis of fourth-quarter and full-year 2011 earnings reports for the Canadian Edge Portfolio.

Conservative Holdings

Aggressive Holdings

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