Canada's biggest banks racked up restructuring charges in recent quarters as they trim costs and cut jobs in response to a challenging environment of slow economic activity and fast technology-driven change.
Should investors be cheering?
Bank stocks have certainly weathered the restructuring charges well. Since the fourth quarter of 2013, these charges have totalled about $2-billion, and more are likely on the way as banks shift resources from traditional branch banking to the development of whiz-bang features for mobile phones and computers.
Yet, bank stocks have risen more than 18 per cent over this period, outperforming the broader S&P/TSX composite index by about 4 percentage points. Canadian bank stocks have also outperformed European and U.S. peers by wide margins this year.
This suggests that investors see an upside here. Yes, charges can weigh on the banks' reported quarterly profits. But there could be a longer-term payoff if lenders become leaner as they face new competition from technology-based rivals.
Indeed, charges could even lead to bigger bank profits down the road, which is something that investors will be thinking about next week when the Big Six banks roll out their fiscal third-quarter financial results. Bank of Montreal will kick off earnings season on Tuesday.
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Robert Sedran, an analyst at CIBC World Markets, looked at the impact of the restructuring charges so far, and found that, theoretically at least, they could boost bank profits by an average of 6 per cent between 2017 and 2019 if the banks do not reinvest the majority of their savings (admittedly, a big "if").
That looks like a nice potential tailwind, given that revenue growth among most banks is sluggish due to a backdrop of slow loan growth, weak commodity prices and an economy that is skirting recession.
But not all banks would be rewarded equally. As Mr. Sedran explained in a note, "In general, those banks with higher efficiency ratios would have a higher theoretical benefit from the same proportionate reduction in their respective efficiency ratios."
That means banks that are already quite fit-and-trim would see fewer benefits from cutting their expenses, while those with more room to cut would gain the most.
Royal Bank of Canada, the most efficient bank, has not taken restructuring charges related to expenses in recent quarters. Nonetheless, if it did improve its level of efficiency in line with its peers, it would theoretically boost its profit by a ho-hum 5.3 per cent.
At the other end of the scale is Bank of Montreal, which could get a sizable 7.9 per cent boost to its profit.
Somewhere in the middle, Toronto-Dominion Bank and National Bank of Canada could each see profits bump 6.1 per cent higher, while Bank of Nova Scotia's profit would rise 5.5 per cent. Mr. Sedran did not provide numbers for Canadian Imperial Bank of Commerce, his employer.
"It is important to note that we show this analysis simply to gain a better view of the potential size of the opportunity at each bank," Mr. Sedran cautioned. "This is not to say that each, or any bank for that matter, will actually achieve all or any of these theoretical benefits."
His analysis, however, provides a helpful way to approach restructuring charges.
While these charges can suggest that banks are reacting defensively to one of the most profound periods of change to hit the financial sector in decades, they also indicate that banks are adapting and thinking of the bigger picture.
"The revenue pressure is real and not changing any time soon. Similarly, the expense needs are real and not changing any time soon," Mr. Sedran said. "Management will have to take a long-term view and worry less about quarterly reporting."