Ian Bickis, The Canadian Press
Published Monday, February 21, 2022 1:31PM EST
Last Updated Monday, February 21, 2022 4:02PM EST
TORONTO – Investors watching bank earnings that start this week will be keeping a keen eye on any hints at how the institutions expect to fare with the two big trends this year: rate hikes and inflation.
The central banks of Canada and the U.S. are expected to start raising rates in March, so analysts will be watching for any outlook changes from Canadian banks on how they expect the higher rates to play out, Scotiabank analyst Meny Grauman said in a note.
“The outlook for rates and the impact that this will have on earnings should remain investors’ key focus heading into Q1 reporting.”
Expenses will be another key trend to watch as wages and other costs rise in the competitive growth environment and as banks invest heavily in technology, Grauman said.
RBC analyst Darko Mihelic said in a note that bank CEOs have so far been saying inflation risk is manageable, but he’ll be looking for any change in tone given recent inflation data and the rising costs U.S. banks reported in January.
He forecasts that first quarter expenses will be up 1.1 per cent from the previous quarter, and up 3.9 per cent from a year earlier.
Mihelic said that for first quarter results, he expects core earnings per share to climb three per cent quarter-over-quarter and nine per cent year-over-year.
For 2022 as a whole, he expects core earnings-per-share growth of six per cent, driven by rising interest rates, improved loan growth and solid credit quality.
The earnings results for the quarter ended Jan. 31 come as the Canadian bank index has well outpaced the TSX and S&P 500 as investors have shifted from growth stocks such as technology to more value-oriented options like banks, which are now trading at the higher end of their historical trading range.
Grauman, however, said bank stocks still have room for growth amid rising interest rates, a strong Canadian mortgage market and a shift to value stocks.
“The key risks to our outlook include COVID, as well as the prospect that rate increases trigger a recession, but we view those risks as relatively modest and believe that the positives continue to outweigh the negatives at this stage in the cycle.”
Dividend increases were the big focus of the last quarterly results, but Grauman said he isn’t expecting further increases this quarter.
One of the other remaining unknowns is the potential special tax on banks that the federal government has said is coming, possibly to be announced in conjunction with the next budget.
But investors so far haven’t shown much concern, Barclays analyst John Aiken said in a note last month.
“The market has shrugged off the impact, likely because it can be recouped through fees.”
The coming higher rates should benefit banks globally, but especially in Canada, he said.
“For the Canadian contingent, which has been facing net interest margin compression, the relief will be palpable.”
Royal Bank kicks off earnings on Thursday, followed by CIBC and National Bank on Friday, BMO and Scotiabank on March 1, and TD Bank on March 3.
This report by The Canadian Press was first published Feb. 21, 2022.
Companies in this story: (TSX:RY, TSX:BNS, TSX:BMO, TSX:NA, TSX:TD, TSX:CM)
TD holds off on dividend hike; Beats Q2 profit estimates – BNN
The Toronto-Dominion Bank beat profit expectations in its latest quarter despite muted performances across its major divisions. It also became the only major bank thus far this earnings season to not raise its quarterly dividend.
TD said its net income in the fiscal second quarter, which ended April 30, rose three per cent year-over-year to $3.81 billion. On an adjusted basis, its profit fell to $2.02 per share from $2.04 a year earlier. Analysts, on average, expected $1.93 in adjusted earnings per share. Overall credit quality improved sequentially, as TD set aside $27 million for loans that could go bad, compared to $72 million in the prior quarter.
Revenue and expenses in TD’s Canadian retail banking unit both rose nine per cent year-over-year, while profit inched up two per cent to $2.24 billion. Lending activity ramped up in the quarter, with the total personal loan book hitting an average of $402.7 billion, compared to $373.3 billion a year earlier, while business loans jumped 16 per cent to almost $101 billion.
A number of one-time items affected profit in TD’s U.S. retail banking unit. On an adjusted basis, net income in that business fell 10 per cent year-over-year to $769 million. TD said the downturn was caused in part by a much more moderate release of funds from loan loss provisions (US$15 million, compared to US$173 million a year earlier).
TD is awaiting final regulatory approvals to proceed with its US$13.4-billion takeover of Memphis, Tenn.-based First Horizon Corp. That transaction was announced in February; at the time, TD said the deal would make it a top-six bank in the United States thanks to the addition of First Horizon’s 412 branches and more than 1 million customers. It also said it hoped to close the deal in the first quarter of fiscal 2023, which is a period that ends Jan. 31, 2023.
Meanwhile, similar to many of its peers that reported earlier this week, TD’s wholesale banking unit (which includes capital markets activity) suffered profit erosion as net income fell six per cent year-over-year to $359 million.
“As we continue to emerge from the COVID-19 pandemic we face new economic uncertainties and growing geopolitical tensions. TD has proven its ability to adapt to changing circumstances and deliver performance and progress,” said Bharat Masrani, TD’s president and chief executive officer, in a release.
TD most recently announced a dividend hike (to $0.89 per share) in December; before that, the last hike was announced in February 2020. Shortly thereafter, Canada’s banks were told by their regulator (the Office of the Superintendent of Financial Institutions) to hold off on dividend hikes and share buybacks due to the pandemic. That guidance was lifted in November.
Prior to OSFI’s intervention, TD regularly raised its dividend on an annual basis. However, Masrani has indicated dividend hikes aren’t on a pre-set schedule.
“It’s not a bad assumption that we like to look at this on an annual basis, and then hopefully we get into that cycle. But it doesn’t mean that we will not periodically look at it on a different cycle based on circumstance and the environment we might be in,” he said during a conference call with analysts on Dec. 2.
“Generally, our cycle has been annual and that has worked out reasonably well for us, but it will depend on the environment going forward.”
Broadcom Agrees to Purchase VMware Shaking Up the Industry – ServeTheHome
This is one of the more interesting acquisitions we have seen in years. Broadcom (formerly, and trading under the ticker symbol for Avago that purchased Broadcom) is traditionally a hardware player that is going to become a big software player overnight. This is part of the company’s shift to enterprise software after purchasing CA Technologies. It also follows a fairly predictable plan for the company’s leadership.
Broadcom Agrees to Purchase VMware
While the company is now Broadcom, it was previously Avago. Many longtime readers know that we have chronicled the business practices of Broadcom/ Avago for some time, even back to 2016 in the Business side of PLX acquisition: Impediment to NVMe everywhere. After Broadcom’s failed Qualcomm bid in 2018 due to anti-trust concerns, the company pivoted to add enterprise software. The company purchased CA Technologies and Symantec’s enterprise security business now building a software unit that VMware will fit into.
Many in the hardware industry that we cover know Broadcom-Avago’s game plan. They purchase companies like PLX that makes PCIe switches. These are usually the best components in markets with few if any competitors (Microchip is probably Broadcom’s biggest competitor in the PCIe switch space.) In these low competition markets, Broadcom raises prices and also puts heavy bundling burdens on hardware companies where supply or reasonable pricing are withheld.
This is not just done to small server makers. A great example where we saw this to the detriment of customers we saw in our An Important HPE ProLiant DL325 Gen10 Change Since Our Review piece. Here in the top center of the photo, you can see the pads and silkscreen for the “BCM5719” 1GbE NIC. On the right, you can see an Intel i350-t4 add-in NIC. This may seem confusing.
Here is the previous generation’s same area (but with the PCIe riser installed). Here you can see the NIC:
What happened to make HPE not place the designed-in Broadcom 1GbE controller is that Broadcom raised prices several fold on a fairly commoditized part for HPE servers. Quad-port 1GbE NICs are 4Gbps in an era where 200Gbps NICs were available making them the relatively low-value NICs in many servers. The value of these NICs is that Broadcom was designed into the ProLiant Gen10 line. HPE’s option at that point was to either capitulate and pay higher prices or do what we see in the above photo and move the NIC to an add-in card with an Intel controller. We strongly prefer the Intel i350 to Broadcom’s chips in this line, but that was not the point. Instead, the expansion slot had to be used for an additional add-in NIC and could not be used for higher-speed NICs. We had been deploying these servers with 40GbE dual-port NICs in this slot, and could not in this server because of the Broadcom move.
Not only was a massively increased pricing on a designed-in part an annoyance to HPE, and many of HPE’s customers, but it also meant another PCB had to be added to keep costs reasonable. Given the focus on environmental consciousness, adding another PCB is not what we would want to see. From rumors that we heard, keeping the Broadcom chip, given the pricing and HPE’s margins, would have likely meant a greater than $100 increase in price for the servers even the lower-end models that sell for $1000-$1300. This is on a relatively low-value chip. The Intel i350 at this time was in the mid-$20’s.
While this may seem like an isolated case, we have heard stories like PCIe switches getting 3x more expensive overnight post-PLX acquisition and to this day, server manufacturers often tell us about Broadcom’s heavy-handed business practices. These have happened beyond just PCIe switches and NICs and even with things like LSI controllers after that acquisition.
That is the company that is buying VMware. While we are discussing hardware lock-in due to being designed-in, VMware customers should be very cautious. Broadcom’s playbook is to push for higher pricing in its acquisitions and across its portfolio to customers that have little ability to switch, like with the NICs in the HPE server. Companies running VMware today have high switching costs, and so Broadcom likely knows that it can sell the same software and support for more without having many companies leave.
For Michael Dell and many of those that will have a liquidity event with VMware’s purchase, this is a great day. For customers of VMware, it may be worth thinking about contingencies if prices rise. Increased pricing may be fine but from the server hardware industry perspective, VMware customers should expect this under new leadership. Get ready for a big change in the industry.
Twitter investors sue Elon Musk over stock manipulation claims – Engadget
Elon Musk is facing yet another lawsuit over his planned Twitter acquisition. Reuters reports investors have sued the Tesla CEO for allegedly manipulating stock prices ahead of his $44 billion takeover bid. As in an earlier suit, Musk supposedly saved $156 million by failing to disclose that he’d bought more than a 5 percent stake in Twitter by March 14th, violating SEC rules. The investors said Musk only disclosed his investments in early April, when he revealed that he owned a 9.2 percent slice of the social network.
Musk’s post-announcement statements also amounted to manipulation, the investors said. They were particularly concerned about his claim that the deal was “on hold” until Twitter could prove that bots weren’t a major problem and represented less than 5 percent of accounts.
The plaintiffs in the case are hoping for class action status, and ask for unspecified damages if they’re successful. Twitter has declined comment, and Musk hadn’t responded to Reuters‘ requests for comment.
Musk’s hoped-for purchase has already sparked a flurry of legal action. In addition to the previously mentioned lawsuit from April, a Florida pension fund sued Musk for purportedly violating a Delaware law that would bar the merger until 2025. The SEC, meanwhile, is investigating Musk’s disclosure timing. There’s no certainty any of these actions will succeed, but they still pose serious challenges to Musk’s ambitions.
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