Investing in Canadian Bank Stocks- Summary of Q2/07 Results

Posted by admin on June 4, 2007 in Investment Products

CIBC was the last of the big Canadian banks to report their Q2 result last week. This post is a summary of some details I found interesting from the reports, press conference and subsequent analysts reports. To take a page from Sport Illustrated’s Peter King, this posts can be entitled “facts about Canadian banks that may only interest me.” I usually pick up these notes to determine where the banks are going in the future.

For competitive market analysis, some banking industry analysts have recently begun to use the term “the Big Two” to describe RBC and TD which some believe are pulling away from the pack by reason of larger sales force and more branches (not to mention the two banks with the greatest expansion plans in the U.S.). RBC, despite missing the market’s expectations (if you call a 14% profit missing expectations), is still considered consider top dog. Here are my highlights from the reports (in order of reporting):

Bank of Montreal: The good: cost savings measures earlier this year are going to save the bank $300 million from the $135 million announced earlier this year; domestic banking revenue is up 7%. The bad: Domestic banking revenue is up despite continuing to lose market share so who knows how long the gain can continue.The ugly: Everyone knows about the trading losses. My thoughts: Needless to say, a bank experiencing difficult times in the short term.

TD Canada Trust: The good: Wholesale banking grew at an industry leading 20% while loan losses remain, according to RBC Capital Markets, “non-existent”. The bad: TD has already warned that, seasonally speaking, Q1 and Q2 are more profitable for wholesale banking than Q3 and Q4 so the bank may have peaked for the fiscal year. The ugly: TD Banknorth (its American banking operations) continues to lag the rest of the bank’s performance (ugly is a relative term; RBC experienced similar difficulties when it first entered into the US aggressively). My thoughts: (I own TD stock) TD seems to be the market darlings now (it has the highest price to earnings of the big banks); too expensive for me to add to my holdings.

Royal Bank of Canada: The good: In the first 90 days after opening its high interest on-line banking account, RBC took in $1.6 billion from outside RBC. RBC has also lead the Canadian mutual fund industry in net sales for long term mutual funds for 14 consecutive quarters. RBC has a well deserved reputation for being the best sales driven bank. The bad: RBC’s failure to meet expectations was due to higher than expected disability insurance claims (which suggests seasonal rather than structural issues). The ugly:Market reaction knocked over a dollar off the stock after the bank released it results. My thoughts: (I own RBC stock) as others have suggested, due to its recent decline in price, it may be a good buying opportunity for a stock with a historical performance above the TSX 60 (as usual, please conduct your own due diligence on any stock purchases).

Bank of Nova Scotia: The good: Dividend increased to 45 cent/quarter. BNS has the most excess capital of the big banks (some money to buy more foreign banks?). The bad: Despite its growth, the percentage growth in domestic retail revenue and profit lags its competitors. The ugly: Trouble ahead? BNS has a greater exposure to corporate lending than its competitors (40% of its loan book vs. 31% of industry average), a risky field of lending. If potential interest rate hikes squeeze corporate profits, BNS could be exposed. Its wealth management division is perceived to be weak relative to competition (a structural weakness and not seasonal). My thoughts: A bank firing on all cylinders but doesn’t have enough horses domestically to catch RBC or TD. Watch what it does internationally if you are interested in the bank since its boxed in domestically.

CIBC: The good: Market share of consumer deposits has been on the rise for 2 consecutive quarters; earnings per share matched most estimates. The bad: market share in the credit card market has been declining and domestic profits from retail banking was below estimates indicating that CIBC is losing market share in retail banking. The ugly: 3% decline in share price following release of results. However, RBC Capital Markets suggests that a dividend increase may be in store in the near future (there may also be a share split given its price). My thoughts: I don’t know what to make of this bank-the CEO was hired to basically right the ship after Enron. Thus, its not really pursuing any grand ambitions compared to some of its competitors. A good franchise but it always seems to do something imprudent every 5 years which makes me weary.

As usual, please conduct your own due diligence if you are interested in purchasing Canadian bank stock. This post is merely a summary of interest facts and not a basis to form an investing opinion. Have a good Monday.