Bank earnings recap

Another earnings season for Canadian banks has come and gone, and the credit crisis picture doesn't appear to be getting any clearer.

Results were a bit of a mixed bag. Scotia, Royal, BMO, TD and National Bank all saw their profits dip a little, while CIBC squatted down and unloaded yet another $1-billion loss for the quarter. The bank that I own, BMO, didn't exactly knock my socks off, but based on analyst and shareholder reaction, the news was not quite as bad as it could have been (or indeed has been in recent quarters) so I took their numbers as muted good news.

All in all, though, we're not out of the woods yet. When a bank like Royal, which has so far managed to keep its hands pretty clean in the subprime mess, starts announcing hundreds of millions of dollars worth of writedowns, it's clear this isn't over.

Banks are as good a proxy for the economy as a whole as anything, so today's news that the Canadian economy actually contracted during the first quarter shouldn't be much of a surprise.

I have no idea how all of these credit problems are going to play out, but it's clear they haven't worked their way through the system yet.

Banks 2.0

When most people think of Web 2.0 applications like Facebook, YouTube and Myspace, they don't really equate them with big business and high finance. But that doesn't mean the banks aren't dipping their toes in the water. The banks are moving into Facebook, with both RBC and TD sponsoring their own personal finance-related groups to try to court new, young customers. I sort of find the idea of stodgy old banks starting a toehold on facebook kind of funny, but it's serious business for their perspective. If You can't get Mohammed to come to the mountain, bring the mountain to Mohammed, I guess. TD's group boasts more than 10,000 members, so maybe it's working.

Me? I have my doubts. When I hear the word "YouTube," I think of an inexhaustible catalog of videos of dudes getting hit in the crotch. Not exactly the kind of "sound investment" I like to put my money into, but what do I know? Market darling Google thought enough of the potential to slap down $1-billion to own YouTube outright, and who am I to disagree. Then, last week, Microsoft bought a tiny ownership stake in Facebook, in the process valuing the company at more than $15-billion. I have my doubts that Facebook will be able to maintain its popularily with users once the endless parade of unsolicited "friend requests" from commercial entities start flooding inboxes, but I've been wrong before.

From an investing standpoint, I wouldn't touch these companies with a 10-foot pole, but once the baby boomers have been squeezed for every penny they're worth, the industry needs to move on to the next generation of financial illiterates.

The fact that they're all hanging out on facebook at the moment might be as good a reason as any to stake your ownership claim, or failing that, make sure your product is being pitched with reckless abandon on it in the interim.

It's happening before my very eyes. All in know is this -- some people are going to make a lot of money in this trend, and some will lose a ton. Whether it's shareholders or facebook users that are left holding the bag remains to be seen.

More bank notes

Since my experience with PC Financial's high-interest savings account has been largely positive, I've been mulling over switching to their no-fee daily bank account for my everyday chequing account.

I currently have a chequing account with RBC, a Visa card there too, and I keep my investments in an RBC Directinvesting account. That didn't really happen by design, but over the years I've grown to appreciate the convenience of having all my accounts in one place and being able to transfer money easily. I'm certainly not with RBC because they're the cheapest. I pay $4 per month to maintain my chequing account there, and $0 for the Visa because I pay my bill on time in full every month. In the past few years I've moved from about 20-30 debit transactions per month to less than 5 as I've been very diligent about putting absolutely everything I can on Visa for the points.

I usually say savings trump other factors , but part of me appreciates that I benefit from their size and heft when it comes to things like customer service when something goes wrong or having to find a bank machine somewhere nearby. If I were to count the advantages of keeping my everyday cash with RBC, I'd have to say they are the proximity to bank machines, ability to make same-day transactions (for paying off Visa or moving money into my investment account when an opportunity presents itself. Taking money out of my PC Financial savings, for example, would currently take at least two business days while I transfer it online to RBC and then find a bank machine to get it out.)

To me, $4 a month ($48 a year) seems a reasonable price for that. But let's do a little more detailed cost-benefit analysis here.

The obvious advantage of the no-fee chequing account at PC Financial? As the name implies, it's the 'no fee' part. That's a $48 annual savings right off the bat. But there's more. PC Financial offers 250 PC points every month for keeping $1000 in the account. Assuming I moved $1000 float from savings into the account to get that reward, I'd accrue 3000 PC points per year -- assuming I didn't use the account at all for things like buying groceries, which would boost my points. How much is 3000 PC points worth? As far as I can tell, about $3 worth of groceries. So my total savings in this scenario are now $48 worth of annual fees saved, plus $3 in benefits. I'm going to assume that things like customer service and prevalence of CIBC bank machines (who run PC's finance division) are a wash, so they don't enter into it.

Is $51 enough to make the switch? Honestly, I don't think so, but there are a few more factors to consider. Like the interest I lose from moving that $1000 out of my 4.25% savings and into effectively, an account that pays me 0% interest. That's $42.50 a year on the other side of the ledger. The benefits are getting smaller.

From where I sit, the only way this makes sense financially is if I play for keeps -- don't use the PC account merely as a "points-generating" mechanism, but actually use if for everyday use. I'd really start racking up some grocery points then. But I really like my RBC Visa card and would want to keep it. My plan to get free rewards from it is working perfectly. If that were the case, and I was going to use a PC account for things like my paycheque and debit transactions, but keep my RBC Visa and investment accounts open, I'd be well-served to keep the RBC chequing account open in some manner as an intermediary to them. Maybe converting it into a pay-as-you-go account would be best, where I'd pay $0 in principle, but a nominal fee (I think it's 50 cents) every time I made a transaction like paying my Visa bill or moving money into savings.

Forgive the jumbled structure of my thoughts on this one, but it's an insight into how my brain works. I'd love any insights from people who've done what I'm thinking of doing.

Essentially, my concerns boil down to this: Can you actually function without in some way being a customer of the big banks, and only use the fringe discount products? Or is that getting too cute by half?

I'd hate to go to the hassle of switching all those accounts over only to figure out the savings I accrued were nowhere near the cost in hassle I paid to get them.

Bank Notes

In a move that clearly demonstrates they're on the cutting edge of the 19th Century, Royal Bank manned up this week and announced they were lowering their online investing commissions to a more reasonable $9.95 for users with $100,000 in their account or who make more than 30 trades in a quarter.

That's some nice window dressing, but I see this as largely a symbolic act. Cutting prices for customers who A) already have the most assets and B) are more likely to recompense your losses by using the service far more frequently is not what I'd call forward-thinking customer service. The discount for active traders is particularly irksome to me because it really looks like RBC is trying to rope people into being day-traders by offering them 'savings'. But I digress. RBC and the other big banks can get away with doing stuff like this because Canada's banking system is an oligopoly, and people like me will more often than not keep our business with them -- especially when I hear about the headaches people have have with the actual discount players like Questrade, Etrade and Credential Direct. As a Big Bank shareholder, bring on the screw-job, I say.

On the opposite end of the spectrum, PC Financial, where I keep my emergency fund/condo downpayment, has very quietly raised their rate on their savings account. It's now at 4.25% for people with more than $1,000 in the account, like me. By my count, this keeps them a full 0.5% ahead of the granddaddy of them all, ING Direct.

What can I say, besides, "I'm glad I made the switch." I'm tempted to open up a no-fee chequing account there and keeping $1,000 in it just to rack up some free grocery points, but I haven't crunched the numbers to see if the money I'd lose in interest would be replaced by the amount of free groceries that would buy me.

Great minds think alike

It's rare that I find myself agreeing with Canada's major banks on very much, but I was certainly nodding my head more than usual as I read the story in this morning's Globe on what the heads of Canada's major banks think about the current market turmoil.

In a nutshell? Yes, the August swoon isn't pleasant for anyone, but it is probably necessary to shake out some of the bad bets people were making. When money is easy, there isn't adequate pricing of risk. Markets can't go up forever, and the current bull run will emerge stronger because of it.

But we're not out of the woods yet. "People haven't gone to confession yet," TD Bank head Ed Clark was quoted as saying. "Your gut is telling you there's a lot of stuff to come out in the marketplace." In other words, we haven't seen the worst yet because a lot of these credit problems haven't seen the light of day in quarterly reports yet. That's going to happen over the next 3-6 months.

Add it all up and I come to the conclusion that the market's going sideways for awhile. Fundamentals will inch it up, but every time some new company fesses up to bad debts, it'll sink down again. So I'm in no immediate rush to get money into the market any time soon, but I'm still very positive on the mid- to long-term outlook. I have not a shadow of doubt that the Canadian banks will by and large remain the profit-making machines they always have been, so if they keep stagnating for much longer, I might be tempted to scramble together some more money to put into them.

Strange but true -- bankers can help you

Had an interesting conversation with a finance-minded friend of mine this past weekend.

Like most Canadians, I have a natural distaste for Canadian banks. Don't get me wrong -- as an owner, I love them for the profit-making machines they are. But as a consumer and citizen, it doesn't take very many TV ads trying to trick yuppies into buying a house they can't afford, or conning Boomers by showing how happy the grandkids would be if they'd only take the plunge and finally get that palatial Muskoka cottage to bring my blood to a slow simmer.

Combine my natural aversion to them with the fact that online banking is so prevalent these days, and the result is what it is -- I don't think I've actually stepped up to a teller at a bank branch in a couple of years.

That might be costing me money, my friend informed me over a pint last weekend. "Go down and meet with a banker," he suggested, because they can actually do some good things for you. He said his decision to meet with a banker a few years ago was one of the best decisions he's ever made. Once he opened up about all his debts, all his assets, and discussed what his financial goals were -- everything from home ownership to estate planning, the banker formulated some semblance of a long-term plan, and actually helped it along somewhat by cutting out expenses and maximizing returns in places along the way.

He's now in the market for a house, and he says he's getting mortgage offers well below the posted rates and has fees waived for all sorts of services.

The idea, I think, is that if you grant someone access to every level of yoru financial life, they can occasionally surprise you by coming up with plans and options to make it all happen.

Given how bankers make their money (hint: rhymes with bees) I'm somewhat skeptical of his claims, but I must admit I'm intrigued. I'm curious -- for all we hear that bankers are just in it for the money, does anybody out there have any truly good stories to tell about how bankers have really helped them?

Trading note -- Bring on more bank fees, I say

Made my first stock purchase in a while last week. I'm pleased to say that like 99% of Canadian investors, I'm now a happy owner of bank stocks. I put $3200 into BMO shares. Yes, yes, I know that BMO's currently trading at an all-time high -- but we're talking about the big banks here, people: the old rules don't apply. I'm not expecting my shares to skyrocket overnight so I can cash out in a few weeks time, but in terms of buy-and-hold Canadian dividend investing, the banks really are no-brainers. I'm confident my tiny stake in BMO will do what I hope it will -- slowly grow over time, giving me dependable capital gains and a steadily increasing dividend payout.

That'll probably be the last position I'll be instigating in Canada for a while now, because barring a major market correction, the whole TSX looks a tad pricey to me. As per my asset allocation targets, my next purchase will probably be to pad up my international holdings -- most likely via an emerging market ETF since I currently have no exposure to that sector.