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The profit outlook for Canadian banks is fine and will likely always be fine. The big banks in particular are too central to the functioning of the economy to ever suffer a severe lack of revenue. The current average annual dividend yield of 4.7 per cent will also help investors avoid losses in the shorter term.

The sector outlook may, however, be more problematic than investors are used to. Scotiabank analyst Meny Grauman warned clients to play defence in the sector in a research report this week, and to protect capital rather than attempt to maximize returns.

The analyst believes that U.S. bank failures and subsequent volatility will validate the Canadian banking model of fewer, larger and better capitalized members.

At the same time, investors will now focus more intently on the potential for losses on commercial real estate loans as limiting liquidity.

The central business of bank loans involves borrowing at short term interest rates and lending to clients at higher longer-term rates. (The difference, the net interest margin, is profit). Deposits are becoming more expensive as a source of funds because interest on bank accounts must climb to compete with rising returns on money market funds or customers will move their assets.

Short-term bond markets, another source of funds for the banks, are also getting more expensive. The three-month domestic T-bill yield has climbed from 0.20 per cent in mid-2020 to 4.5 per cent now.

The effects of higher borrowing costs for bank customers will almost certainly cause more debt defaults. Banks will have to increase their provisions for credit losses, and this amount is subtracted from quarterly profits.

Canada’s big banks start reporting fiscal second quarter results next week. All told, Mr. Grauman forecasts profits will be down 7 per cent relative to the first quarter and 5.0 per cent lower compared with a year ago. He recommends TD Bank as his top pick in the sector, thanks to its “underappreciated fortress balance sheet” and defensive properties.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Major Drilling Group International Inc. (MDI-T) This gold-related stock has not participated in the bullion rally since October, but Contra Guys’ writer Philip MacKellar thinks it may be ready to pop. So far this year, the shares are down 5.6 per cent. Yet, he says there’s a lot to like here. Major Drilling has well-established relationships with large and junior miners, and a modern fleet of drill rigs. Moreover, the organization is conservatively managed and has a strong balance sheet that holds high cash, low debt and ample working capital.

The Rundown

How David Rosenberg and other economists are reacting to surprisingly hot inflation data

Tuesday’s unexpectedly hot inflation reading for Canada has money markets bracing for the possibility that rate hikes may not be over in this country. That contributed to the TSX’s worst day in two months on Tuesday. Darcy Keith has more on the latest bets for interest rate changes this year and what economists, including David Rosenberg, are saying.

AI will change investment management - and often, for the better

Artificial intelligence will change investment management, says veteran portfolio manager Tom Czitron. For instance, AI is fantastic news for the so-called quants – workers who design and implement complex models that allow financial firms to price and trade securities. By contrast, AI will be absolutely terrible news for stockbrokers who pitch their high-priced “investments de jour” to their clients.

Commodity prices likely to stay volatile as inflation and recession battle plays out

Brian Donovan of StockCalc takes a look at how some commodity prices have moved over the past month and their latest outlook.

Others (for subscribers)

Analysts’ forecast returns, yields and recommendations for all TSX Composite stocks

Number Cruncher: 22 outperforming Canadian equity funds

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Portfolio moves

Bill Ackman’s Pershing Square unveils new stake in Alphabet

Arrowstreet, Coatue Management among big hedge funds buying Meta in first quarter

Warren Buffett’s Berkshire Hathaway invests in Capital One, sheds four stocks

TSMC added by Macquarie, Fidelity and Coatue after Warren Buffett cut stake

Ray Dalio’s Bridgewater dumps bank stocks amid turmoil in first quarter

Globe Advisor

Meteoric rise in power of ‘finfluencers’ sparks concerns

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Ask Globe Investor

Question: John Heinzl recently wrote that brokers often provide incorrect adjusted cost base numbers on T5008 Statement of Securities Transactions slips. As such, he advised investors to double-check the figures against their own ACB calculations. What should people do if they find a mistake in their ACB?

Answer: If ACB errors aren’t caught, they can result in incorrect calculations of capital gains and losses when a stock is sold. A chartered accountant told me he is experiencing these mistakes on a regular basis with clients. Not only are the numbers often wrong, but the box for the cost or book value is sometimes left blank, said the accountant.

What should investors do if they find a mistake? The accountant said he simply enters the correct ACB on the client’s return and e-files it to the Canada Revenue Agency.

--John Heinzl

What’s up in the days ahead

Billionaire investor Ken Fisher will tell us why gold doesn’t belong in most portfolios.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

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Compiled by Globe Investor Staff