This year, Canada’s banks made $63 billion in profit. Is that a lot?
Last week, Canada’s big five banks reported their financial results for the fourth fiscal quarter of 2022. As you would expect, there are a lot of complicated numbers involved in bank financial reports, and I am not smart enough to understand all that.
So let’s keep it really simple.
Here are the profits for each of Canada’s five biggest banks in 2022:
RBC — $15.8 billion
TD — $17.4 billion
BMO — $13.5 billion
Scotiabank — $10.1 billion
CIBC — $6.2 billion
TOTAL: $63 billion in profits in 2022.
Now, $63 billion is a staggeringly large number. Making sense of a number that big is a recipe for madness.
For example, if you try to understand why TD’s profits are higher than RBC’s profits, you might read the write-up from James Bradshaw, the Globe and Mail’s (very good!) banking reporter. When you do, you will quickly encounter a paragraph like this:
“ Its results were helped by a favourable tax rate, and included two large items that boosted results: a $2.3-billion gain on an interest-rate hedging strategy tied to its US$13.4-billion acquisition of First Horizon Corp., and a $997-million gain on the sale of shares in Charles Schwab Corp.”
I worked as a business journalist for a few years, and I’d say I kinda understand what that sentence means. But only kinda.
For what it’s worth, Bradshaw is vastly better than the banks themselves, who are mostly only disclosing financial results because a) they’re legally required to do so, and b) they want professional investors and financial analysts to buy their stock and stuff.
The people who tend to read bank financial reports tend to be interested in specific details like the rate of revenue growth or the specific unit economics of one segment of the business. These are the sorts of details that help these people make smart investing decisions.1
Reading the actual financial earnings reports from RBC, TD, BMO, Scotiabank and CIBC will leave you exhausted, confused, annoyed, afraid or all of the above.2
So rather than getting into the details and really trying to understand the nitty gritty of how the banks make their money, I’m going to come at this a different way.
Spotlight on RBC
I’m going to focus on Royal Bank of Canada now. As measured by market capitalization, RBC is the biggest company in Canada. Even thought TD posted higher profits this year, RBC is the big dog in Canadian banking.
RBC earned $15.8 billion in profits in 2022.
One way to look at that number is that it’s a lot of money! The City of Toronto spent about $15 billion last year to fund literally the entire municipal government — the roads, the cops, the parks, social services, etc.
Another way to look at RBC’s profits is that they are small compared to the real big dogs of global capitalism.
Apple recorded US$99.8 billion in profits in 2022.
In fact, Apple’s fourth quarter profits amounted to US$22.7 billion, and because those are American dollars, once you do the conversion to Canadian currency, Apple’s profits in three months were nearly double RBC’s profits for the whole year!
Having a monopoly on selling iPhones, and taking a 30% tax on App Store transactions is insanely profitable.
However, Apple has close to 2 billion of its devices active in the world. Apple sells to the entire world. By comparison, RBC’s annual report discloses that they have a total of 17 million clients, and out of those, more than 14 million clients are Canadian.
Put another way:
Apple is selling iPhones and iCloud subscription fees to the entire world, and it’s very profitable.
RBC is selling financial services mostly just to Canadians and it is very profitable.
And RBC isn’t under any pressure to invent a new augmented reality headset to maintain their dominance. As long as they keep collecting mortgage payments and debit fees, they can keep watching the profits roll in.
Focus on profits
It is worth saying that Dave McKay doesn’t get to just stuff $15.8 billion into his pocket and go shopping for a yacht. These are large publicly traded companies with shareholders. RBC uses its profits to do boring things like stock buybacks and paying dividends to shareholders and buying other banks.
Lots of RBC stock is held by, like, pension funds and institutional investors and individual Canadians who are investing in safe stocks to help them save for retirement.
The $15.8 billion in profits that RBC earned this year doesn’t flow to RBC and sit in a big pile of cash in a conference room. In reality, a lot of money flows through RBC in myriad ways, and RBC skims $15.8 billion and distributes it to shareholders. (And Dave McKay gets very handsomely paid3 for his efforts.)
I think it’s worth focusing on profits because that reflects how much money the company is able to skim. If you look at Apple, their total revenue was around US$394 billion, and their profits were around US$99.8 billion, so their profit margin was about 25%.4
On the other hand, Enbridge, Canada's largest oil and pipeline company, reported $6.3 billion in profits on $47.1 billion in revenue, which works out to about a 13% profit margin. Apple has a monopoly on iPhones, but Enbridge doesn’t have a monopoly on selling oil, so Apple can charge higher prices and take more profits.
This is why I think it’s worth noting that RBC’s profits this year are more than the entire operating budget of the city of Toronto, and all together, the big five banks earned more profits than Quebec spent on health and social services in 2022.
A Concluding Thought
What have we learned here?
Man, I dunno. Nothing maybe?
I guess we learned that the banks made a lot of money last year, and I looked at a bunch of financial documents and wrote about it in a longwinded fashion.
To be clear, this is not meant to be a polemic about the banks. I am not saying that the profits they earned are morally repugnant, or that they’ll all be put on trial for their crimes after the glorious revolution.
I am not a revolutionary. In fact, I assume I probably own some stock in the big five Canadian banks in a roundabout way through my RRSP, although I haven’t peeked under the hood of the Wealthsimple robo-advisor, so I don’t know for sure.
What I am is a guy who wants to understand what’s going on.
Online, and in my private life, I hear a lot of people talking about the economy and capitalism and corporations and stuff. People are mad! And people are worried about the housing market and the economy and stuff!
As it turns out, the banks are a rather important part of the housing market, and the economy and stuff.
But I don’t often see people delving into the financial reports and talking about the actual numbers. Generally, the people who are actually delving into the numbers and nitty gritty stuff are people who work in the system and trying to make money from the system.
I just want to understand what’s going on, so I look at the financial reports. I will probably keep writing about it, and maybe eventually I will understand what’s going on.
I am not interested in making smart investing decisions. For the love of god, do not use anything I’ve written as the basis for making investing decisions.
If you are thinking about taking investing advice from me, here is what I think you should do: Go find a field and dig a hole and put all your money in the hole.
This sentence is autobiographical.
About $15.5 million last year, but it’s complicated. Not quite billionaire yacht money, but certainly a very nice boat in Muskoka. https://www.advisor.ca/news/industry-news/mckay-tops-bank-ceo-pay-as-strong-earnings-lead-to-compensation-bump/
This is all incredibly oversimplified in ways that would probably make serious financial people very mad. But I’m just a guy with a Substack yolo.