Weekly Trends

Ryan Lewenza, Larbi Moumni September 4, 2015

Please read domestic and foreign disclosure/risk information beginning on page 4 Raymond James Ltd. 5300-40 King St W. | Toronto ON Canada M5H 3Y2.

2200-925 West Georgia Street | Vancouver BC Canada V6C 3L2.

Solid Bank Profits Despite “Recession” So it’s official. The Canadian economy is in recession, as defined as two

consecutive quarters of negative growth. The Canadian economy shrank in the second quarter with GDP growth of -0.5% annualized, following the 0.8% decline in the first quarter. While technically in recession, it does not “feel” like one, as the weakness is concentrated in a few areas and we are not seeing the typical, widespread conditions normally present during a recession.

We believe the worst is behind the Canadian economy and see a stronger H2/15. Key supports for this include: 1) monthly GDP data showed the Canadian economy grew at 0.5% M/M in June, which was the first positive monthly print in six months; 2) the US economy appears to be turning the corner which given the high correlation with our economy should be supportive; 3) we expect consumer spending to remain healthy; 4) exports should strengthen in H2/15; and 5) we believe the negative hit from low oil prices will begin to diminish.

Despite a challenging macro backdrop Canadian banks held their ground in Q3/15. The Big Six delivered an average 5% Y/Y EPS growth with Canadian Imperial Bank of Commerce (CM) and Bank of Montreal (BMO) posting the highest EPS growth of 9.9% and 7.5%, respectively.

Bank of Nova Scotia (BNS) and Royal Bank (RY) raised their quarterly dividend as expected. However, CM surprised the markets by raising its dividend for the fourth consecutive quarter. The rest left their dividends unchanged.

Overall, Canadian banks delivered decent results despite a weak macro environment which reinforces our positive long-term view on the industry.

Equity Market YTD Returns (%)

Canadian Sector TSX Weight Recommendation

Consumer Discretionary 6.9 Overweight

Consumer Staples 4.4 Market weight

Energy 19.1 Market weight

Financials 35.8 Market weight

Health Care 6.0 Market weight

Industrials 7.9 Overweight

Information Technology 2.9 Overweight

Materials 9.4 Underweight

Telecom 5.3 Market weight

Util ities 2.2 Underweight

Technical Considerations Level Reading

S&P/TSX Composite 13,601.5

50-DMA 14,268.8 Downtrend

200-DMA 14,728.6 Downtrend

RSI (14-day) 40.1 Neutral

Source: Bloomberg, Raymond James Ltd.

-16.7

-4.8

2.4

-5.5

-4.6

-5.1

-11.8

-7.0

-20 -15 -10 -5 0 5

MSCI EM

MSCI EAFE

MSCI Europe

MSCI World

Russell 2000

S&P 500

S&P/TSX Small Cap

S&P/TSX Comp

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

15,500

16,000

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

S&P/TSX

50-DMA

200-DMA

Chart of the Week

While Canada Is “In” A Recession It Does Not “Feel” Like One

Source: Bloomberg, Raymond James Ltd.

3.2

2.0

2.72.9

1.0

3.43.2

2.2

-0.8-0.5

1.92.1 2.1

2.3 2.2 2.1

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

Q1/13 Q3/13 Q1/14 Q3/14 Q1/15 Q3/15 Q1/16 Q3/16

Canada GDP Q/Q Annualized

Consensus Forecast

Technical Recession

Weekly Trends September 4, 2015 | Page 2 of 4

Canada Falls Into A Technical Recession

So it’s official. The Canadian economy is in recession, as defined as two consecutive quarters of negative growth. The Canadian economy shrank in the second quarter with GDP growth of -0.5% annualized, following the 0.8% decline in the first quarter. While technically in recession, it does not “feel” like one, as the weakness is concentrated in a few areas and we are not seeing the typical, widespread conditions normally present during a recession (significant job losses, declining home prices etc.). For example, the weakness in the second quarter was largely driven by steep declines in business investment (-8%), which continues to be impacted by capex spending cuts in the energy and mining industries. Offsetting this weakness were gains in consumer spending and international trade. We believe the worst is behind the Canadian economy and see a stronger H2/15. Key supports for this include:

Monthly GDP data showed the Canadian economy grew at 0.5% M/M in June, which was the first positive monthly print in six months, and was the highest monthly growth rate since May 2014. We believe this positive momentum sets up the Canadian economy for a stronger third quarter, with consensus currently forecasting Q3/15 growth of 1.9%.

The US economy appears to be turning the corner following a disappointing first quarter. The US economy grew at an impressive 3.7% in Q2/15, with recent data suggesting further strength in H2/15. As seen in the accompanying chart (sidebar), the Canadian economy is highly correlated with the US economy, so further strength in the US should be supportive to our economy.

We expect consumer spending to remain healthy driven by continued job gains, low mortgage and borrowing costs, and rising home values.

Exports should strengthen in H2/15, driven by stronger US economic growth and the weak CAD dollar. Exports were weak in H1/15, but June exports rose 6.4% M/M to $44.6 bln, a trend we expect to continue in H2/15.

Finally, we believe the negative hit from low oil prices will begin to diminish as we’re likely in the 7

th inning of the capital spending cuts. Also, we continue to

believe oil prices are forming a bottom, and could rise in H2/15 and into 2016.

It has been a challenging period for the Canadian economy as confirmed by two consecutive quarters of negative growth. However, we believe the worst may be behind us, as we see our economy slowly improving in H2/15.

Canada’s In A Technical Recession Exports Recently Turned Higher

Source: Bloomberg, Raymond James Ltd.

3.2

2.0

2.72.9

1.0

3.43.2

2.2

-0.8-0.5

1.92.1 2.1

2.3 2.2 2.1

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

Q1/13 Q3/13 Q1/14 Q3/14 Q1/15 Q3/15 Q1/16 Q3/16

Canada GDP Q/Q Annualized

Consensus Forecast

Technical Recession

37

39

41

43

45

47

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

Canadian Exports (blns)

-6

-4

-2

0

2

4

6

8

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Canada GDP Y/Y

US GDP Y/Y

r = .90

Canadian Economy Is Highly Correlated With US Economy

Source: Raymond James Ltd.

Weekly Trends September 4, 2015 | Page 3 of 4

Canadian Bank Earnings Recap

The Big Six posted strong results this Q3/15, beating EPS consensus estimates by an average 4% and showing solid year-over-year (Y/Y) growth. In this section we summarize the highlights from Q3 earnings season and provide our preferred picks.

Despite a challenging macro backdrop and short term market turbulences, Canadian banks held their ground. The Big Six delivered an average 5% Y/Y EPS growth with Canadian Imperial Bank of Commerce and Bank of Montreal posting the highest EPS growth of 9.9% and 7.5%, respectively. Bank of Nova Scotia, National Bank (NA), Royal Bank and Toronto-Dominion Bank (TD) delivered below average results. Key highlights from the quarter include:

Stable Credit Quality. Given a weak economic environment and loan exposure to the energy sector, credit quality remains a concern among investors. Looking at loan loss provisions (provisions set aside as an allowance for bad loans) all banks posted a stable metric on a quarter-over-quarter (Q/Q) basis except for BNS and TD.

Weak Wholesale Profits, but Solid Wealth Management. Wholesale net income was the main drag coming in at -3% Y/Y on average, pressured by less favorable market conditions. Results were bifurcated as BMO, BNS, and RY posted negative Y/Y growth while the others were all positive. The Wealth Management divisions of the Big Six delivered positive results, in part driven by strong fee-based revenue. The Wealth Management segments averaged 11% Y/Y growth with strong performance from BNS and CM.

Strong Retail Banking. The retail banking segment also delivered solid net income growth across the Big Six coming in at 6% Y/Y for the quarter, helped by loan growth of 5%. BNS and CIBC posted above average retail gains while RY and TD lagged.

Solid Dividend Increases. BNS and RY raised their quarterly dividend as expected. However, CM surprised the markets by raising its dividend for the fourth consecutive quarter. The rest left their dividends unchanged. The Big Six yield an average of 4.5%, with NA yielding the highest and TD the lowest.

Overall, Canadian banks delivered decent results despite a weak macro environment, lower oil prices, and housing concerns. For us, this reinforces our positive long-term view on the industry and why we view TD Bank and Royal Bank as core holdings in our Guided portfolios.

Big Six Canadian Banks Deliver Solid Q3/15 Earnings Results

Source: FactSet, Raymond James Ltd.

Quarterly EPS Y/Y EPS Quarterly Dividend Dividend

Company Ticker EPS Surprise Growth Dividend Yield (%) Change

Toronto-Dominion Bank TD-CA $1.20 $0.02 4.3% $0.51 3.86 No change

Bank of Montreal BMO-CA $1.86 $0.13 7.5% $0.82 4.61 No change

Canadian Imperial Bank of Commerce CM-CA $2.45 $0.14 9.9% $1.09 4.65 $1.09 to $1.12

Bank of Nova Scotia BNS-CA $1.45 $0.00 3.6% $0.68 4.70 $0.68 to $0.70

Royal Bank of Canada RY-CA $1.66 -$0.01 2.5% $0.77 4.29 $0.77 to $0.79

National Bank of Canada NA-CA $1.25 $0.06 4.2% $0.52 4.76 No change

Weekly Trends September 4, 2015 | Page 4 of 4

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This newsletter is prepared by the Private Client Services team (PCS) of Raymond James Ltd. (RJL) for distribution to RJL’s retail clients. It is not a product of the Research Department of RJL.

All opinions and recommendations reflect the judgement of the author at this date and are subject to change. The author’s recommendations may be based on technical analysis and may or may not take into account information contained in fundamental research reports published by RJL or its affiliates. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. Nor is it an offer to sell or the solicitation of an offer to buy any securities. It is intended for distribution only in those jurisdictions where RJL is registered. RJL, its officers, directors, agents, employees and families may from time to time hold long or short positions in the securities mentioned herein and may engage in transactions contrary to the conclusions in this newsletter. RJL may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this newsletter. Securities offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund.

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