Over the past 2 weeks, all Canadian Banks reported their latest earnings. If there is one thing that is solid among the dividend investing world, it’s Canadian Banks! They are evolving in a government protected oligopoly with the opportunity to find growth outside their countries.
Using their core Canadian business to generate cash flow, banks grow through various strategies:
- Surfing on the US economy growth
- Using financial markets to spice-up their earnings
- Going into Latin American where expected GDP growth is quite interesting
- Focusing on wealth management, because this is where the money is
One thing I do with my team is that we track over 1,000 stocks on a quarterly basis to make sure companies are on track (or not!) with our investment thesis. This kind of follow-up is crucial to make sure we have a solid portfolio that is able to go through any stock market drop.
Today, I’m offering you our review (and ranking) of the 8 major Canadian banks.
#1 Royal Bank
Their most recent quarter:
- EPS of $2.20, +7%.
- Net earnings of $3.2B, +6%.
- Dividend of $1.02/share, no increase.
RY posted another solid quarter. Personal & Commercial banking increased $90M or 6% from last year with average volume growth of 7%, including strong deposit growth of 9%. Wealth Management increased 9%, primarily attributable to higher net interest income. Tha insurance segment decreased 10% from a year ago, primarily reflecting lower favourable investment-related experience and increased disability and life retrocession claims costs. Treasury was hit as income decreased 29%, primarily due to lower funding and liquidity revenue, and lower client activity. Finally, Capital Markets increased 17%, primarily due to higher revenue in Global Markets. Royal Bank is definitely my best pick in the financial sector. You can download the complete financial stocks list here.
#2 TD Bank
Their most recent quarter:
- EPS of $1.75, +8%.
- Net earnings of $3.26B, +6%.
- Dividend of $0.74/share, no increase.
TD posted a good quarter and posted revenue growth in Canadian and U.S. retail businesses and stronger Q/Q growth in its wholesale business. Canadian retail adjusted net income of C$1.88B increased 2% Y/Y and revenue rose 8% on increased volumes, higher margins and more assets under management in its wealth business. U.S. retail adjusted net income of C$1.26B rose 20% Y/Y, with TD Ameritrade contributing C$258M; the U.S. retail bank net income of C$1.01B increased 17% Y/Y on an adjusted basis. TD continues to enjoy a stable economy on both sides of the border.
#3 National Bank
I hold National Bank in my pension portfolio. While the stock has been lagging over the past 12 months, the bank continues to post strong and steady growth. Most importantly, its dividend growth rate over the past 5 years gives it the #3 spot among the 8 largest Canadian banks.
Their most recent quarter:
- EPS of $1.51, +5%.
- Net earnings of $558M, +2%.
- Dividend of $0.68/share, +4.6% increase.
For a while, National Bank’s results were greatly supported by its Financial Markets segment. This quarter, it’s quite the opposite. Personal and Commercial was up 9%, Wealth Management up 5%, U.S. Specialty Finance and International up 14%, but Financial Markets was down 16%. The decrease is attributable mainly to lower revenues from the Global Markets revenue category. You can imagine what numbers would like if this segment performed this quarter! Rising 4% from a year ago, personal lending experienced growth, particularly due to mortgage lending, while commercial lending grew 9% from a year ago.
#4 BMO
Their most recent quarter:
- EPS of $2.30, +5%.
- Net earnings of $1.522B, +4%.
- Dividend of $1.03/share, +3% increase.
Another quarter, another dividend increase for BMO. The bank raised its payment by 3% for a total of 7% in 2019 (2nd increase). Credit doesn’t seem to be an issue so far as BMO posted provisions for credit losses (PCL) of $176 million compared with $160 million in the prior year. Keep this number in mind going forward, though. Canadian P&C adjusted net income was up 5% while US surged by 16%. Wealth management was a bit slower with growth of 3%. Unfortunately, BMO would have hit one out of the park if Capital Markets hadn’t shown a decrease by 11%. Results were offset by severance expense and higher provisions for credit losses.
#5 ScotiaBank
When you have the opportunity to invest in a solid company like ScotiaBank that gives you access to international markets, why would you need to find another bank in another country? I don’t think you need to invest in international stocks to have a diversified portfolio.
Their most recent quarter:
- EPS of $1.70, -1%.
- Net earnings of $2.263B, +3%.
- Dividend of $0.87/share no increase.
Growth coming from International banking and Wealth management wasn’t enough to please analysts as BNS missed expectations on a modest quarter. Q1 International Banking adjusted net income increased to C$805M from C$675M a year ago. These results were driven by strong loan growth, particularly in the Pacific Alliance countries and the impact of acquisitions. Merged Chilean operations are gaining market share while creating considerable synergies. Interesting enough, provisions for credit losses increased to $873M from $534M last year and $688M last quarter. Is it the sign of a slowdown?
#6 CIBC
Their most recent quarter:
- EPS of $2.97, +1%.
- Net earnings of $1.348B, +2%.
- Dividend of $1.40/share, no increase
I don’t think we can call this a “strong quarter” when you post low single-digit growth for both EPS and revenue. In fact, CM had a hard time getting its business growing and got saved by Capital Market this quarter. Q2 Canadian Personal and Small Business Banking adjusted net income of C$463M fell from C$586M. Commercial Banking and Wealth Management adjusted net income of C$328M increased from C$310M, while U.S. Commercial Banking and Wealth Management adjusted net income of C$176M improved from C$142M a year ago. Capital Markets adjusted income of C$279M rose from C$249M.
#7 Canadian Western Bank
Their most recent quarter:
- EPS of $0.74, +1%.
- Net earnings of $210M, +7%.
- Dividend of $0.27/share, no increase.
It seems Alberta’s economy isn’t doing too bad as CWB posted a positive quarter. Strong 10% loan growth drove total assets over the $30 billion milestone for the first time in CWB’s history. Loan growth reflected continued execution of CWB’s Balanced Growth strategy, including very strong 14% growth in general commercial loans and expansion in every province, with the strongest growth rates in Central and Eastern Canada. CWB is investing in its brand awareness (marketing) and digital platform to compete against the big 5, but we still prefer the other banks.
#8 Laurentian Bank
Their most recent quarter:
- EPS of $0.95, -29%.
- Net earnings of $43.3M, -27%.
- Dividend of $0.66/share, +1.5% increase.
LB posted weaker earnings as this quarter’s performance continued to be impacted by transformation related investments and costs related to labour relations which can now be reduced. It was a good thing for everybody when the new collective agreement was signed. These measures led to net restructuring charges of $3.4 million in the quarter. The decrease in net interest income was mainly due to lower year-over-year loan volumes. At least LB shows a solid credit portfolio with provisions for credit losses at 0.11%. Let’s hope it’s not overly confident from management. LB also raised its dividend modestly but don’t think shares will thrive in the upcoming quarters.
Canadian Banks are not Pokémons: You don’t need to catch’em all!
When we generate portfolio reports for our members, we notice that many of them have 4, 5 even 6 Canadian banks in their portfolio. I think this is a great example of “diworsification”. There is nothing wrong in holding a few good companies in the same sector. The problem is when you get close to holding the sector as a whole. Holding many banks expose your portfolio to unnecessary risk without getting any upside potential.
I know it’s hard to believe because if you have been holding the “Big 5” for the past 10, 15, 20 even 25 years, you probably beat the TSX each time. However, this is playing Monday morning quarterback with your portfolio. A similar exercise would have told you that holding tech stocks such as Microsoft (MSFT), Apple (AAPL), Netflix (NFLX), Facebook (FB), Alphabet (GOOG/GOOGL) and Amazon (AMZN) would have return a lot more than holding Canadian banks.
I believe holding 2-3 Canadian banks will provide you the best of this sector (steady growth and strong dividend perspective) while not duplicating your holdings for nothing. Keep in mind that Canadian banks are not protected from a market crash either. The key is, and will always be, to have a well diversified portfolio.
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Disclaimer: I own RY.TO, NA.TO, MSFT, AAPL, AMZN.
Value and Dividend investors would not have bought the FANG stocks nor Microsoft nor Apple until they announced a dividend, their PE / EV/EBITDA dropped and Shareholder’s yield increased. Comparing banks to these tech growth machine stocks is comparing apples and oranges.
I have held the big 5 Bank shares in a non-registered account since the 80s but if I was starting today I would just buy TD, RBC and BMO for their US growth, dividends and lower than market PEs. BNS has lost its way in their Fintech strategy and foreign divestments. CIBC will have difficulty growing as quickly as the others with its domestic focus and Canada’s lower economy growth. I have considered selling BNS and CM but would have to pay significant capital gains income taxes. I am not convinced I can find safer eligible dividend stocks to replace them that I don’t already own.
I was simply comparing 2 sectors as the point was not about the dividend, but the fact that banks did incredibly well on the market over the past 25 years. If banks would have lagged the market for 25 years and just paid their dividend, we would not have this conversation :-).
And if banks would have put more money into commercial papers back in 2006-2007, we would not have this conversation either. This is why it’s important to not put too much money in a single sector.
Owning the 5 banks for the past 20+ years was great, but it’s not a strategy because you couldn’t have done this (owning pretty much the whole sector) with any other sectors and show similar results.
As for taxes, that’s a totally different issue! I guess you will have to find a solution sooner or later (if not, your heirs will have to deal with it). But that’s a great problem to have ;-).
I hold diversified portfolios that reflect the Canadian and US markets not just Canadian banks. I definitely have a domestic bias dues to income tax rules which is likely a bigger risk than holding 5 banks vs 3.
Death and taxes are definitely life certainties. I believe I have more control over when and how much on the latter.