On Thursday the S&P 500 was up 0.9% but Toronto was down 0.8% after disappointing results from the banks. AutoCanada was down 4.8% after RBC initiated coverage with a muted outlook.
On Friday markets were higher on expectations that the U.S. debt ceiling “crisis” would soon be resolved. The S&P 500 was up 1.4% and Toronto was up 0.7%.
Costco was up 4.3%. That was surprising given that on Thursday, after the close, it reported relatively weak results and headlines indicated that earnings and revenues were below expectations. Costco is such a powerhouse that the market apparently looks past the somewhat weaker results.
American Express was up 4.1%.
It was disappointing to see Canadian Western Bank down 5.9% after it reported lower than expected Q2 results. On the one hand the provision for credit losses was up 21 basis points versus the prior quarter. On the other hand, that’s because the provision in the prior quarter was negative 9 basis points due to a recovery of prior expected credited losses. CWB’s provision for expected credit losses this latest quarter was only 12 basis points and that’s lower than its long term average of about 20 basis points and is a very low level of credit losses. The market was disappointed that the net interest margin was lower. That’s caused by higher deposit interest (which have adjusted upwards very rapidly) whereas the interest charged on loans has not yet fully adjusted to the higher rates – but it is adjusting fairly rapidly. The market is also disappointed that CWB is now projecting slower loan growth. But that seems logical – every company should be more hesitant to borrow as interest rates rise. CWB is still projecting about a 10 to 11% adjusted return on equity for this year and that’s not a bad ROE when the shares are trading at just 66% of book value. I was glad to see that they have ceased issuing shares under their “At The Market” program. With lower loan growth they don’t need to issue more equity and can fund growth from retained earnings. The dividend was increased by 3% for a total increase of 6% in the past year. I believe it will ultimately be shown that these shares are significantly under-valued.