How Canadian Banks Fared Last Quarter?


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All Canadian Banks reported their earnings last week. As they are the heart and soul of the Canadian Economy, I’m always excited to follow their reports. Usually. if Canadian banks do well, the Canadian economy follows. If their quarter is hard, it also means most Canadian businesses are having a hard time.

I’ve previously shared my Canadian Banks ranking on this blog so this time I’ll just review my investment thesis and the potential risks for each of the Big 6!

Canadian Imperial Bank – CIBC (CM/CM.TO)

CIBC operates through the following segments: Retail and Business Banking, Wealth Management and Capital Markets. CM shows a more “classic” approach than its peers.

Investment Thesis

While CIBC lags behind the other banks on the stock market (along with ScotiaBank), it gives investors the opportunity to pick a 5% yield without much risk. We like its idea to grow through its wealth management division, but the integration of Private Bank will represent a crucial step. If you are looking for additional income, CM is probably one of the best picks on the Canadian stock market, but don’t expect the stock to soar. CIBC is trading at a low PE ratio compared to its peers. The reason is simple: less growth perspective. At least the dividend is not at risk, and you will enjoy consistent paycheck raises.

source: CM Q4 2020 presentation

Potential Risks

Put it like this, ask your 5-year-old to choose a Canadian bank based on its logo and you get a good investment… if it’s not CIBC! The bank is one of the worst in terms of returns over the past 5 and 10 years and is also the one with the least growth vectors. Its heavy concentration in the mortgage business could hurt CM’s results in the upcoming years as the housing market seems to reach a plateau and regulation tighten mortgage rules. Considering the unknown impact on the virus on the economy, we would rather go with larger banks such as Royal or TD. If you consider CIBC as a “deluxe bond”, you won’t be disappointed (high yield, mediocre stock price appreciation).

ScotiaBank (BNS/BNS.TO)

The Bank of Nova Scotia is known as Canada’s “international bank” and is a global financial services provider. The bank has five business segments: Canadian banking, international banking, global wealth management, global banking and markets, and other. It is the third- largest bank in Canada.

Investment Thesis

BNS is the most innovative bank in the industry. It has done lots of business outside Canada and always with an open mind. BNS deserves its international label with 40% of its assets outside Canadian borders. This hasn’t always been an advantage as BNS ran into its share of problems with Latin American economic struggles. Expected GDP growth for these countries is quite interesting (a lot higher than Canada and the U.S.), but it comes with its load of uncertainties and volatility. BNS is now a dominant player in Chile with its most recent acquisition of BBVA Chile in 2018. Unfortunately, the way COVID-19 has been spreading across South America and Mexico is a source of concern. The dividend is safe, but it will be a long road to recovery for BNS.

source: BNS Q4 2020 presentation

Potential Risks

The bank ran into several challenges such as the situation in Venezuela. It seems that being present in emerging markets is not always a plus. Overall, diversification is a good strategy, but BNS’ international presence adds more volatility to its business model. We see how the pandemic effects this business segment right now. The bank must take higher provision for credit losses. Following the most recent events, BNS along with all other Canadian banks being watched. Their response to the crisis and how the Canadian government responds will have an important impact on their stock price. Expect lots of volatility until we know the economic impact of the virus.

Bank of Montreal – BMO (BMO/BMO.TO)

Bank of Montreal conducts its business through four segments : Canadian personal and commercial banking, U.S. P&C banking, wealth management, and capital markets. The bank’s operations are primarily in Canada, with a material portion also within the U.S. It has a strong presence in wealth management through Harris Bank.

Investment Thesis

BMO decided to take the stock market path to ensure its growth. It was the first Canadian bank with its own ETF on the market. Competition is fierce but being among the first Canadian issuers surely helped to build momentum in a growing market. Over the years, BMO concentrated on developing its expertise in capital markets, wealth management, and the U.S. market. BMO also made innovative moves such as the introduction of its own ETFs and a robo-advisor. Growth will happen in these markets for banks in the upcoming years. BMO is well-positioned to surf this tailwind. When you can grab this bank with a 4% yield, you make a good deal.

source: BMO Q4 2020 presentation

Potential Risks

Relying on capital markets and wealth management as main growth vectors mean BMO can hit a speed bump. While their fact sheet shows a dividend growth of 8% CAGR over the past 15 years, BMO isn’t that generous anymore. After a pause of 3 years in its dividend growth policy (following the 2008 crisis), BMO started to grow its dividend again but lags its peers in that field. We don’t see any dividend increases in 2021 for Canadian banks (or maybe toward the end of the year). They must all deal with higher provisions for credit losses and thin interest margin. While they are well capitalized, this also means banks will be less generous. As interest rates would be stable at best in 2020, the interest rate margin spread will tighten limiting the bank’s ability to generate higher profit.

TD Bank (TD/TD.TO)

TD is the second largest Canadian bank by market cap and is often jockeying side-by-side for the 1st position with Royal Bank (RY). TD is the most classic bank in Canada with its business model focusing a lot on retail banking. Its portfolio is well diversified between Canada (61%) and the U.S. (30%).

Investment Thesis

A stronger economy from both countries led to TD’s stronger results between 2010 and 2020. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has a large exposition in major cities like Toronto, Vancouver, Edmonton and Calgary, combined with a strong presence in the US. With about a third of its business coming from the U.S., TD is the most “American Bank” you’ll find this side of the border. If you are looking for an investment in a straightforward bank, TD should be your pick. This bank is a good example of a perfect dividend triangle. Unfortunately, the pandemic will affect this triangle and you will have to wait until 2021 to see another dividend increase. Nonetheless, TD is a strong bank.

source: TD Q4 2020 presentation

Potential Risks

The housing market has been a concern since 2012, but TD seems to be managing its loan book wisely. The Canadian economy has been remarkably resilient too. A higher insured mortgage level in the prairies seems adequate while TD continues to ride the ever-growing downtown Toronto housing market. Keep in mind that a housing bubble is always just around the corner. Now that interest rates have been cut by the Central Bank of Canada, it will be difficult for classic banks such as TD to thrive. The interest rate margin is narrowing. The green bank will have to find other growth vectors to please investors. Follow the bank’s provision for credit losses quarter to quarter during the pandemic.

Royal Bank – RBC (RY/RY.TO)

Royal Bank is the largest bank of the group by market cap (it battles with TD). RY has a strong position in the personal and commercial banking sector (46% of its revenue). In 2015, RY bought City National, a Los Angeles-based bank focused on high net worth clients. The transaction opened US doors and another growth vector: wealth management.

Investment Thesis

Over the past 5 years, RY did well because of its smaller divisions acting as growth vectors. The insurance, wealth management, and capital markets push RY revenue. Those sectors combined now represent over 50% of its revenue. During the COVID-19 pandemic, these are also the same segments helping Royal Bank to stay the course. Royal Bank also made huge efforts into diversifying its activities outside Canada. Canadian banks are protected by federal regulations, but this limits their growth. Having a foot outside of the country helps RY to reduce risk and to improve growth potential. Royal Bank shows a perfect balance between revenue growth and dividend growth. It’s a keeper.

source: RY Q4 2020 presentation

Potential Risks

After the 2018 financial market crash, the bank put its focus on growing its smaller sectors. While wealth management should continue to post stable income, the insurance and capital markets are more inclined to hectic returns. As the largest Canadian bank, Royal Bank could also get hurt by a bearish housing market. There are some general concerns around Canadian Banks and how they manage their provision for credit losses. RBC loan portfolio has been affected by the pandemic, but provision for credit losses has been smaller for Q4 2020 vs Q3 2020. We will have to wait for next year to see if the economy will suffer from another virus outbreak before we can get the vaccine across the country.

National Bank (NTIOF/NA.TO)

National Bank is very small compared to the big 5 Canadian banks. As the sixth largest one, NA is mostly in Quebec with 62% of its revenues earned in this province. Its smaller size is currently paying off as National Bank was quicker to develop a strong brand in Wealth Management with Private Banking 1859 and built a highly profitable Financial Markets division.

Investment Thesis

Like BMO, NA aimed at capital markets and wealth management to support its growth. Private Banking 1859 has become a serious player in that area. The bank even opened private banking branch only in Western Canada to capture additional growth. Since NA is heavily concentrated in Quebec, it concluded deals to do credit for investing and insurance firms under the Power Corporation (POW). Branches are currently going through a major transformation with new concepts and enhanced technology to serve clients. While waiting for the results, it seems wise to invest in digital features to reach out to the millennials and improve efficiency. The stock has outperformed the Big 5 for the past decade as it showed strong results. Recently, NA is seeking additional growth vectors by investing in emerging markets such as Cambodia (ABA bank) and in the U.S through the acquisitions of Credigy. Can it have more success than BNS on international grounds?

source: NA Q4 2020 presentation

Potential Risks

National Bank is still highly dependent on Quebec’s economy. As a “super-regional” bank, NA is more vulnerable to economic events. So far, the covid-19 situation in Quebec as been well managed and NA posted satisfying results in May 2020. However, we are far from being done with the pandemic. Capital markets revenues are also highly volatile. NA could run into a bad quarter if the stock market enters into a bearish environment. The bank has considerable exposure to the oil market through its commercial loan portfolio. Overall, the bank performs very well, but usually take a little more risk to find growth vectors (such as ABA bank investment and capital markets). So far it has paid well, but it doesn’t mean it will always work.

Q4 2020 Earnings Review

Probably the best news of this quarter was: no dividend cuts! Canadian banks had also a strong message to send to all investors. How about I save you some time? I went through the earnings reports more in depth in the video below. You’ll get all you need to know without having to read hundreds of pages!

Final Thoughts

National Bank is still my favorite. I really like their growth perspectives and how they built a strong brand in wealth management.

Overall, Canadian Banks have showed their resiliency once again and you can sleep well; they will continue to pay the dividends promised. I don’t expect any dividend increase for the next quarters as banks should remain cautious and keep things under control. The pandemic also forced them to invest some of their liquidity into mobile and online banking. I believe this is a smart move.

Finally, I will never stress about this part enough. While any of the Canadian bank is a good pick for a dividend growth investor, keep in mind that you shouldn’t have more than one or two in your portfolio. Diversification remains a key point to prevent you from losing your hard earned money.

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