Podcast Transcript: Q2 2025 Canadian Bank Earnings

Skye Collyer: The best offense is a good defense in this environment.

Skye Collyer: Welcome to today’s special episode where we’ll be doing a deep dive on Canadian bank earnings for the second quarter of 2025 this is the 19^th episode of its kind running in the series where we come back each quarter on this channel to help you break down and decode the latest quarterly Canadian bank earnings. My name is Skye Collier. I’m an ETF specialist at BMO Global Asset Management, and today we’re joined by our longtime guest and trusted voice. Sohrab Movahedi, Managing Director, Financial Research at BMO Capital Markets. And Bipan Rai, Managing Director and Head of ETF Strategy at BMO Global Asset Management. Sohrab and Bipan, thanks for joining us today. Canada’s big banks reported their earnings for the fiscal second quarter covering the last three months, ending April 30. So going into the quarter, it seemed like analysts expectations were centered around the banks continuing to get a grip on the effects of two main things, number one, higher loan loss reserves and number two, lower borrowing activity. All of course, within the backdrop of plenty of economic uncertainty amidst the US President Donald Trump’s trade war. So Sohrab, you wrote a paper on the Canadian banks on May 1, where the expectation was that we may see performing loan reserve builds in Q2, did this happen? 

Sohrab Movahedi: Well, it did that to let the cat out of the bag. It did as as we kind of had anticipated. So remember, you know, these banks are obviously in the business of lending money. It’s important to be able to get it back. Oftentimes, something bad may happen. You don’t get it back. Sometimes, the backdrop or the economic environment is such that you have to rethink the likelihood of being able to get that money back. And I think you know, the tariff related uncertainties that have been brought about, really since February, have caused some gyrations in the expectations from an economic growth or GDP growth, activity threats or worries around recession. There’s been obviously anticipations of higher unemployment and these all, plus a variety of other things, will factor the ability borrowers to be able to service their debt and for the banks to be able to get their money back. So oftentimes, in anticipation, they will have to adjust their reserving requirements. These we often refer to as the performing loan reserve, so the loans are performing, but it’s the expectation that they may have some difficulty repaying. And so this quarter, you know, across the big six banks, there was a little bit over $6 billion so that’s with a B billion dollars of reserves, and about a third of that, a little bit less than a third 30% would have been reserves in anticipation of future kind of problems such that, you know, as bank shareholders, you know the the anticipated future losses absorb right now, as opposed to kind of surprise us at a bit of a later time. And so if it turns out that the economic environment evolves such that those reserves are not required, then the banks can always, of course, release some of those reserves. So yes, we did see some performing loan reserve building, and I would say that is exactly on time, if you will, from a good management perspective vis a vis the loan portfolios, and some of that would have been obviously directed to their business in Canada, but it would have been more broad stroke.

Skye Collyer: That’s good to hear that about a third or a little under 30% of the reserves are being built up in anticipation of potentially needing it in the future, to the tune of 6 billion. And on that kind of backdrop of the Building Loan reserves, can you give us a further breakdown of some of the other key highlights from the Q2 earnings, like what we saw with PCLs or provisions for credit losses, earnings growth highlights, revenue trends and how the wealth management piece also played into results? 

Sohrab Movahedi: Yeah. So you know, you’ve, we’ve been on this call before, we’ve talked about the Diversified business models that the Canadian banks operate. So Canadian banking, the personal and commercial banking, think of that as the bread and butter. They take, the deposits they make, the loans they collect, the spread, the wealth business. You talked about capital market segments, and then they all will have growth strategies, oftentimes looking beyond Canada. So in the case of, for example, TD, might be in the US. In the case of National Bank, it might be places like Cambodia. In the case of Scotiabank, it might be in LATAM. 

The one thing that is a bit more present, I would say. You know, beyond obviously, the worries around economic outlook and credit and reserve building is, for the first time in a in a while, we are working, or the banks are working, with an upward sloping yield curve. Here I’m looking at the Canadian curve. We’re looking at the 10 year, three month, but it could be a most parts of the curve. You do have the longer end higher than the lower end, and that tends to be very good from a Canadian or any banks really, net interest margin perspective. And so to put things into some context, around half of the revenues, typically for Canadian banks are spread based revenues. So this is the difference between what they pay on deposits and what they earn on assets. And so you mentioned earlier that loan growth has been a little bit subdued, and that’s true, and that’s obviously a byproduct of the trade related uncertainties. But the good news is, the spread between what they have to pay for the deposits or the funding source and what they’re earning on the loans is a bit wider. So that was a tailwind, this net interest margin in the quarter for them. Loan losses and the PCLs we talked about. I mean, obviously there was some order of magnitude of reserve building really. The last quarter, we had seen a bump up in reserve building, preemptive reserve building, I’ll say, would have been the COVID quarter. So this was the first quarter, and we were nowhere near the same order of magnitude of reserve building that happened in response to COVID, but there was a bit of a reserve building over there. What we saw as well, Skye was a couple of the banks, TD, for example, calling out a restructuring charge in an attempt to try and manage its expenses, and all of the banks are trying to make sure their expenses grow at a lower rate than their revenue, so that they could deliver operating leverage. And there is some anticipation, perhaps, that the revenue environment might continue to be a bit more choppy. And so what you manage is the stuff that you have control over, and expenses tend to be one of them. Royal Bank similarly called out some restructuring charges or severance payments. And this may not be totally unusual as the year progresses, depending on how the revenue environment, I guess, is evolving both their business environment. Probably we’ll talk about a little bit more of it specific to different parts of the bank. 

There was greater volatility, obviously, in the markets, because of all the trade uncertainties, and some of the banks, for example, in their wealth businesses, where there is discount brokerage or there’s trading activity, they would have seen some benefit as far as flows are concerned. Over there, obviously in the capital market segments, there would have been some benefits that would have accrued as well. So overall, you know, when we were coming into this year, before all of this trade stuff, we had noted that we would be cautiously optimistic. Obviously, we’ve gotten a lot more cautious since the trade stuff, but the second quarter, you know, obviously some reserve building, but actually the rest was not terrible. You know, as far as the top line growth, as far as being able to deliver operating leverage, and the ROEs, ultimately, which are, which are the litmus test over here, yes, they are being suppressed because of the reserve building, but they’re still quite respectable and an important ingredient in the return profile or the investment case for the Canadian banks. And so I’d say, so far so good. But obviously we always have to keep in mind that banks are placed on the economy, and depending on how the economy kind of evolves, we may have to readjust, I guess, our thinking as it were, on the outlook for the banks. 

Skye Collyer: You’ve mentioned this just now, but if we could expand a little bit more on that trading revenue was a brighter spot this quarter. You know, you spoke a little bit about due to heightened market volatility. Can you help explain to our listeners why that was?

Sohrab Movahedi: Yeah, I mean, obvious. I mean, I shouldn’t say obvious, but presumably everyone noticed beginning of the quarter the concept of tariffs are introduced by the by the US president, and that causes some volatility in the in the markets. We had a march bout of volatility. We had the Liberation Day kind of bout of volatility, which was in April. So what does this volatility do? Probably results in a lot of clients of the trading clients of the counterparties of the bank wanting to do trading either in positions or out of positions or hedging and what have you. And so banks basically being the intermediaries here. They tend to benefit, if I can call it that, in a in a period of volatility where there is increased client activity. 

And by the way, you know that’s a byproduct of this diversified business model, because when you have periods of volatility and your loan losses, reserve building is volatility and risk are synonymous sometimes, and so when there’s a heightened risk period, you’re building some reserves in anticipation of future losses. But the offset here is that you also have the revenues to try and help offset or fund, if you will, some of that reserve building. So again, I would say, probably quite candidly, the the trading revenue ended up coming in a bit better than what we would have been looking for. So that just speaks to the level of heightened activity and the ability of the banks to be able to crystallize on that so revenues were a bit better. Certainly, the trading revenues kind of came in a little bit better as well, and that was just exactly what the doctor ordered, because reserve building was also quite a bit higher than last year. 

Skye Collyer: Thanks, Sohrab. I’m going to bring it over to Bipan now, which is perfect, because we’re talking about how much has changed in the last three months, February, March, April. From your top down point of view, Bipan talk to us about what has shaped almost every element of the Canadian bank’s business over the last three months. Q2 was a big one. Rewinding back to Q1, all big six bank earnings beat expectations, and now in Q2 we had four out of six Canadian banks beat and two miss, which to Sohrab’s point is, you know, pretty good, and we’re in pretty good shape, considering everything that went down over the last three months. What developments are you keeping an eye on that may impact the banks most? 

Bipan Rai: Yeah, I mean, there’s, there’s several, and I think it goes back to what Saurabh was touching on earlier. It’s really the state of affairs when it comes to the Canadian economy that I think is paramount at this point. I mean, we’re talking about what’s changed over the last three months. Only, the most important trade relationship that Canada has ever had has basically been turned on its head. And I think you know, if you project that going forward, we have significant trade barriers now where we did not have them before. I mean, we have tariffs on our steel and aluminum, there’s tariffs on our auto exports to the United States, and also there are tariffs on non-USMCA compliant goods that we export to the United States. I mean, that is going to have a meaningful impact on the trajectory of Canadian growth going forward. I mean, Q1 was a bit stronger than we had anticipated, but a lot of that was pulling forward, some of the momentum in terms of Q2 and if we are to look at what’s going to happen in Q2 you know, the early estimate here is for us, is that we’re at least going to get a negative quarter for growth. Though the model that we have and we run suggests that it could be somewhere between negative point five to negative point seven in terms of quarterly as easily adjusted at the annualized rate for for the Canadian economy. 

But no, here’s the good news, right? If we look at the monetary policy response, the Bank of Canada has conducted one of the most significant and aggressive easing cycles in decades, right? So since the you know, the first rate cut, which is June of last year, up until earlier this year, we have had a significant dose of monetary policy easing from the Bank of Canada, and that, of course, is prudent given the fact that we do have a significant degree of mortgage refi risk later this year. Also, we’ve got a new government, and again, this government, the liberal minority, is operating from a strong minority position. But one of the reasons It got elected was because of a healthy dose of fiscal stimulus that you know now has, you know, significant portion of the market is looking for right? So this will be in terms of spending on three key areas, one of which is, of course, defense. Then we did get a significant announcement on that last week. The other two pillars are, of course, infrastructure and housing. And again, all of that is going to be quite constructive for the Canadian economy, but, and this is a significant but, this will take time to filter through when it comes to real activity. I mean, you know, spending on defense and infrastructure tends to have a elevated fiscal multiplier, but the timing element means that we could be waiting for a while, right? So, you know, we are developing, or at least we are operating in the slower macro environment insofar as Q2 is concerned for the Canadian economy, you know. 

And if we dial it down to things at the at the banks level, again, Sohrab touched on several of these themes. I mean, you know, that potentially portends to slower loan growth as a result of the fact that things are a bit uncertain in the Canadian economy. And again, you know, we did see banks do well due to the increased market volatility that obviously benefited a lot of trading desks. So you did get some offset there. But again, if you’re looking at the long term sustainability of bank profit models, I mean, obviously you want to lean a little bit more on loan growth and ensuring that net income, interest income remains, expanding over the medium to long term. And so in the near term where the macro backdrop looks a little bit patchy. I mean, certainly the PNC segments for certain banks could be under a bit of pressure. But again, I defer that view to Sohrab. 

Skye Collyer: Thanks, Bipan. What I wanted to ask you next is, yeah, I know that you know you did a great job at helping us understand how the macro backdrop has been a little bit patchy amidst so many changes, you know, in the US, around the globe, here in Canada, over the last three months, and some some highlights on what offsetting factors could help alleviate some of those pressures. I wanted to speak to you to that, but I don’t know if perhaps I would open it up to both you and Sohrab at this stage, if, you know, Bipan you wanted to speak to that, and then I could open it up to Sohrab as well. 

Bipan Rai: Sure. So, you know, we have spoken a bit about that. And you know, from a monetary policy perspective, you know, let’s not look past the bank of Canada’s already agreed aggressive easing cycle so far. And again, that is going to betress confidence in the economy. It’s also going to help spur loan growth at the bank level. And you know, over the medium to long term. This is something that should help bridge the gap until, you know, we do see the the benefits of fiscal easing that we’re anticipating to come. The other element that I think is prudent, and certainly something that we’ve touched on in prior podcasts, is the fact that if we look at bank capital, it’s still quite high. I mean, you know, look at the sort of the several of the regulatory capital ratios. Basically all the banks are meeting them. So then, you know, the question turns to, what do you do with this excess capital? Right? Do we expect a, you know, another degree of share buybacks? I know some banks are already looking at that now, and you know that is something potentially to watch for, insofar as you know, the shares for a lot of the big six, or for the big six banks are concerned. 

Sohrab Movahedi: I mean Skye, the only thing I guess I would add is it is obviously a very complicated operating environment, right? So Bipan touched on Bank of Canada and rates. We’ve talked about the geopolitical risks, whether it’s tariffs or broader trade related stuff. There is the, you know, the discussion of funds flow dynamics, and you know where investors may be getting adequately compensated from a risk premium perspective. And does that actually favor a place like Canada, let’s say, over a US. But if you kind of bring it back to the banks, some of the conversations we’ve been having more recently, of call it over the last few months, actually involve non-domestic investors, global money managers, who probably are trying to make some decisions around where they would like to allocate some of their funds geographically. I think Bipan touched on this. You know, the fact that we have a government now in place, I think, is a start of some stability. You know, the fact that, you know our economics department, even, yes, since the year end and the tariff stuff, downgraded their GDP outlook. But subsequently, really, since February, each revision seems to be a bit better than the than the prior one. I think even the broad volatility brought about from the tariffs and trade related, I’ll call it stuff, since February, I think each low seems to be higher than the previous low. So it’s, you know, that I think when we will come through, and when we do, we are probably faced with just a slower growth world, probably it will manifest for banks into probably slower loan growth. It will probably mean, you know, higher discount rates, but then thereafter, banks in Canada are well capitalized. They have, Bipan mentioned it, you know, I’ll kind of reiterate that they are comfortably above regulatory minimum requirements when it comes to their capital ratios. 

But beyond their capital ratios, they also have very good liquidity levels, and they have like we touched on, obviously earlier in the podcast, they have been good and preemptive and reserve building. So these periods of uncertainty, I think when you look at the banks, you always want to make sure they do also have strong balance sheets. These are balance sheets kind of intensive businesses, and you want to make sure they come in to the period of uncertainty with strong balance sheets, which we think the banks are doing. So by no extent of the imagination, do we want to trivialize the difficult operating environment. But I think we also want to take some comfort that bank management teams and the entire system, really in Canada, is helping ensure the banks are tackling these challenges. Well in doubt, I’ll say, with balance sheet resources. 

Skye Collyer: Well, thanks for that, because that really helps explain your mantra, which has been, you know, the best offense is a good defense in this environment. You touched on it earlier going into Q1 it was cautious optimism. And now, you know, consistently, I’m hearing the best offense is a good defense in this environment. And you helped explain that just now. Is there anything else you mean by that when it comes to your outlook for the banks going forward, to share with our listeners? 

Sohrab Movahedi: Yeah, no, I think, ultimately, what do we what are we looking for? I mean, the banks, I think, will be good total return vehicles. I think some banks need a bit more of a tailwind or a fan on for their operations to shine, and some other banks should be able to do it, maybe with more self help type levers. And I think when we say the best offense is a good defense, we look at banks that have the capital flexibility, we look at banks that have the liquidity coverage ratios. We look at the banks that have the adequacy of reserves, so that they are both represent a good place to, I’ll call it hide, in the case of a difficult environment, but also a good place where they have the flexibility to deploy as we come out of the, you know, out of the cave, or as we go through this. You know, Bipan mentioned buybacks. You know, as of this quarter, Scotiabank has also joined the, I’ll call it the buyback party. So five of the six large banks actually have active buyback programs, two varying sizes. But I think at a minimum, that would suggest that they are all, as management teams starting to, or at least, I shouldn’t say starting to, but at least they are communicating, I think, that they have some comfort in the underlying operations of their businesses. Such that they don’t need to to continue to stockpile, if you will, the capital, they can do the reserve building, have the liquidity, but still provide some downside protection and support to their stock prices.

Skye Collyer: And that’s why most advisors I speak to love their Canadian banks for those reasons, exactly. So, thanks so much for that, and I’m going to flip it over to Bipan to talk fund flows. We’ve noticed on the leadership board for BMO ETFs fund flows, year-to-date, we track the top 10 gross outflows and inflows, of course, as well. We noticed, however, that the outflows did include the BMO Equal Weight Canadian Banks ETF (ticker ZEB) and the top 10 gross inflows included the BMO Equal Weight US Banks Index ETF (ticker ZBK). So what do you make of that in terms of ideas to put to work in the portfolio, and what other mandates? Do we have on the shelf, Bipan to get exposure to the Canadian banks in this environment?

Bipan Rai: So I mean, when it comes to, you know, inflows or outflows, especially when it comes to something like ZEB, which tends to be used as a liquidity instrument for a lot of our institutional clients. I don’t think there’s a clear sort of narrative that we can extrapolate from what the flows are telling us about a particular ETF like ZEB. You know, to me, it’s a sort of an instrument that’s that’s primarily there, or at least being used heavily in terms for its liquidity.

Now, let’s, let’s back things up a little bit and talk about some of the themes that we’ve seen play out insofar as this earning season has been concerned. I mean, Sohrab did a great job earlier, identifying that banks are very good at finding diversified revenue sources. And it just so happens that for the last three months, a lot of this was driven by trading volatility, and if we are sort of heading into this murkier backdrop where, you know, loan growth might be a little bit more subdued. I mean, then it really comes down to which banks are a little bit more concentrated in the P&C side of things versus some of the other departments or divisions within banks. I mean, certainly wealth management is something that could do well as we continue to see a recovery from where we were earlier this quarter. And so, you know, we could get the sort of dichotomy of, or at least divergence of bank share price performance. That does suggest that, if we’re looking at things from an ETF perspective, you know, might not be a ZEB story potentially to play instead, we might want to look at, you know, something else that could be a bit more interesting in terms of ZWB, which is really, you know, the BMO Covered Call Canadian Banks ETF, that could be the ETF potentially that does outperform, given the expectation, or the potential that we could see some degree of consolidation. And this could be an environment where, you know, investors might want to look at harvesting yield via the ETF instead. So as far as we’re concerned, from a flow perspective, you know, we do expect to see a greater degree of inflow into such strategies, given the fact that the backdrop is still fairly uncertain, and you know, wouldn’t be out of the realm of possibility, certainly to expect a fair bit of consolidation in the here and now. 

Skye Collyer: Thanks Bipan for that context. Yes, ZWB our equal weights Canadian banks covered call methodology is a great way to maintain exposure to the banks, but at the same time, clip a healthy monthly coupon, which is a combination of the dividend from the underlying banks as well as the premiums we collect for writing out of the money covered calls on 50% of the portfolio. So with that, I’ll just turn it back to Sohrab one last time to see if you have any last words for our listeners before we close out today’s podcast.

Sohrab Movahedi: Look, I think we’ve covered a lot here, and I always enjoy speaking with you and Bipan. I tend to agree with a lot of things we talked about, and I want to highlight something Bipan mentioned as well, which is, historically, we tend to think of the Canadian banks as a bit of a monolythic type of group. But when we are in periods of uncertainty, like the one we’re in, where there is anticipation of economic downturn, requirements for reserve building, and we’ve got tables and charts on this, you start seeing divergences between the valuation multiples of, I’ll call it the higher valued and the lower valued bank. So historically, 20 years, 25 years through the cycle, you’ll see this, that during times where provisions for credit losses are rising, there is greater differentiation between, I’ll call it the winners and the losers when it comes to the banks. And we are in that sort of an environment right now. So I think, you know, picking the right names will matter. I will stay away from the various ETFs that may cover all of these things. But I think differentiation matters here. But I would generally say, and I would remind whoever tends to listen to us, that we think of the Canadian banks always as total return vehicle. So it’s a good combination. Or, you know, the ingredients contributing to the returns are not only earnings growth, maybe a little bit more challenged right now because of the economic outlook, but also dividend yields. They tend to pay out around half of their earnings in dividends. And from time to time, you you can get this total return concept. What I would say is at unreasonable prices. Sometimes those unreasonable prices are too low, sometimes they might be too high. I think we’re probably sitting somewhere where you’re getting a good total return at a reasonable price, right? Not too hot, not too cold, but if you pick the right names or the right strategies, probably get a bit more out performance versus under performance. But on balance, and Bipan kind of highlighted this nicely. I mean, we are in a difficult operating environment. We should not forget about that. And I think as we get through this year, so we’ve gone the first half of the year, we still have the second half of the fiscal year, you know, we were fingers crossed, you know, we get some resolution around trades. And there is some of these existential type uncertainties, kind of lesson. Then the banks are actually, you know, the strong balance sheets, whether it’s liquidity, capital, reserves, all of that sort of stuff, should position them well to hopefully tackle a more vibrant, I’ll say 2026. Before then, we’ll have lots of time to talk, but I think for the time being, you know, we would just say good total return vehicles and room for picking winners from losers, at least with a six to 12 month time horizon. 

Skye Collyer: Thank you so much, Sohrab, Bipan, for sharing your insights today, and to our listeners for tuning in. If you have any questions, please visit our ETF Center at www.bmoetfs.com, for research, news and insights. See you here next quarter when we look at the Q3 bank earnings for 2025. Take care everyone.