The Canadian Banking Roundup: Q2 2015 Edition

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Includes: BMO, BNS, CM, RY, TD
by: Cameron Conway
Summary

Billions of profits were earned in Q2 2015, but which one offers investors the most in return.

Which is best for your portfolio - RBC, TD, Scotiabank, BMO or CIBC?

How Canada’s top five banks compare to each other.

In the past couple of weeks, investors were treated to another round of earnings reports from Canada's Big Five banks. Now with the dust settled, it's time to see what these banks actually offer investors and which ones rank the best. These are interesting days for investors looking into Canadian banking, as the drop in oil prices and the lower loonie not improving the manufacturing sector, many bank stocks are now in discount territory. So let's take a deeper look into how Canada's banks performed.

All financial results are in Canadian dollars unless otherwise noted, and stock information is in U.S. currency based on each bank's shares on the NYSE.

1. Royal Bank Of Canada

In the past few years, RBC (NYSE:RY) has grown itself into the nation's number one lender, after years of falling behind TD Bank. In its Q2 2015 report, RBC posted revenues of $8.83 billion, up from $8.27 billion during the same period last year. Net income rose by 14% to $2.5 billion ($1.68 per diluted share) from $2.2 billion ($1.47 per share in Q2 2014).

In such a tight and matured Personal Banking market in Canada, RBC has managed to continue to steadily improve its performance, with net income from Canadian Personal Banking rising 8% in the quarter to $1.2 billion.

While RBC has its main income base in Canada, the bank has been making inroads into the U.S. banking market. Recently RBC acquired City National Corp at a price of US$5.4 billion in order to accelerate its wealth management presence in the United States. RBC is also seeing great growth in its Capital Markets segment, with 60% of the segment's revenues coming from the United States. The area of concern is that some investors are worried about the added risk this segment adds to the company, and the fact that the Capital Markets segment is approaching its self-imposed cap of 25% of total revenues.

Aside from the added risks from its Capital Markets segment and its recent exit from Jamaica, the bank is still performing exceptionally well, and remains the largest company in the Standard & Poor's/TSX Composite Index.

NYSE Price (June 7)

$63.95

52-week range

$56.40 - $76.08

Annualized dividend payout

$3.08

Dividend Yield

3.87%

Average price target

$75.95

2. Toronto-Dominion Bank

Next up is TD Bank (NYSE:TD) which used to hold the title of Canada's largest bank, while RBC may have played leapfrog over the bank, TD still has lots to offer investors. In its Q2 2015 report, TD saw its revenues climb to C$7.75 billion from $7.43 during the same period last year. On the other hand, reported net income fell to $1.85 billion ($0.98 per diluted share) from $1.98 billion ($1.04 per diluted share), this was in part due to a before tax charge of $337 million from its recent restructuring.

What has been setting TD apart from its rivals in recent years has been its expansion into the U.S. which generated US$476 million in net income in the last quarter, up 8% from last year. TD advertises itself as America's Most Convenient Bank and has risen into the ranks of the top 10 banks operating in the United States (and sixth largest in North America). TD has managed to grow its footprint in the U.S. to 1,300 locations predominantly across the Eastern seaboard. Investors in Canada see TD's presence in more affluent (by average income) regions of the U.S. as a way to indirectly invest in the growing recovery of the American economy.

NYSE Price (June 7)

$43.71

52-week range

$39.56 - 53.49

Annualized dividend payout

$2.04

Dividend Yield

3.75%

Average price target

$56.00

3. Bank Of Nova Scotia

The Bank Of Nova Scotia (NYSE:BNS), aka Scotiabank, aka Canada's Most International Bank, falls short of RBC and TD in terms of revenues and net income, but does offer investors a greater access to emerging markets. In its Q2 2015 report, Scotiabank posted revenues of $5.93 billion, up from $5.72 billion, while its net income dropped by $3 million to $1.79 billion ($1.42 per diluted share), this was still enough to beat analysts' expectations of $1.39 per diluted share.

When taking a look at how Scotiabank's net income breakdown geographically, we see Canada on top with $1.04 billion, the U.S. with $139 million, Mexico with $105 million, Peru at $114 million, and the remainder of the bank's international operations generating $421 million in net income.

Scotiabank has been both optimistic and geographically conservative in its expansions into Latin America, a region that offers exponential growth opportunities in the form of wealth management and personal pensions. Scotiabank has targeted Mexico, Peru, Colombia and Chile for its Latin American operations because they offer the bank "a young, under-banked and growing population, an increasingly educated workforce and a growing middle class." The most recent highlight for the bank in the region is the closing of its 51% acquisition of Chilean financial services firm Cencosud for $280 million, adding 2 million customers to Scotiabank's portfolio.

There are some drawbacks from Scotiabank's international expansions, as it has been seeing difficulties recently in the Caribbean which it has been operating in for over 120 years. Then there is also the less-than-stellar expansion into the Chinese market, but has been aggressive in seeking out immigrants coming to Canada.

In all, Scotiabank is a good middle of the road bank compared to its peers, it is still experiencing positive growth at home in Canada, and it is drawing closer to its goal of an equal split of revenues coming from Canada and abroad.

NYSE Price (June 7)

$53.32

52-week range

$47.62 - 68.71

Annualized dividend payout

$2.72

Dividend Yield

4.1%

Average price target

$70.31

4. Bank Of Montreal

Up next is BMO (NYSE:BMO) which saw its Q2 2015 revenues climb to $4.52 billion from $4.36 billion during the same period last year. Although BMO's revenues were higher, a restructuring cost of $106 million drove down net income to $999 million ($1.49 per share) from $1.07 billion in Q2 2014. BMO was widely seen as more of a stay-at-home bank, with limited expansion beyond Canada's borders. However, following the 2008 crash, BMO joined in with its Big Five counterparts and began to push south, and the bank has begun to see some returns.

In the last quarter, net income from its U.S. operations rose by 31% to US$206 million, which is less than half of what was generated by TD. A potential source of the disparity may lie in geography as BMO has set up its operations in the Midwest which has lower average income and is more susceptible to slowdowns in the manufacturing sector. While TD Bank is more focused on the Northeast and southern eastern seaboard which tends to have higher percentages of high net worth clients.

BMO has been trying to narrow the gap between itself and the other banks by investing into its wealth management segment, most recently with the $1.3 billion acquisition of FC Asset management. Acquisitions such as this has helped to raise its wealth management net income rise by 24% in the last quarter to $238 million, this isn't far off from the $271 million generated by RBC which is seen as the leader in wealth management in Canada.

NYSE Price (June 7)

$60.83

52-week range

$57.37 - 78.56

Annualized dividend payout

$3.28

Dividend Yield

4.33%

Average price target

$68.48

5. Canadian Imperial Bank Of Commerce

Lastly, we come to CIBC (NYSE:CM) which posted the lowest revenues and net income of the Big Five Canadian banks. CIBC in Q2 2015 reported revenues of $3.39 billion, up from $3.16 billion, and a reported net income of $911 million ($2.28 per diluted share), up from $306 million ($2.17 per diluted share). While at first glance, this may seem impressive Q2 2014 saw $543 million in impairment charges from its Caribbean operations.

With its growth in Canadian banking slowing down, CIBC is also once again looking south for growth, a region which has brought the bank much pain in the past. Scandals such as its involvement with Enron and the U.S. subprime mortgage crisis have left investors wary of how the bank may conduct itself in the future. However for CIBC, the United States remains an alluring source of wealth management revenues, and the bank is working towards having up to 40% of its wealth management revenues come from outside of Canada. CIBC needs this American expansion to meet its other goals of having wealth management make up 15% of total net income, and the C$129 million in net income it generated last quarter just won't cut it.

CIBC does offer investors the best dividend yield of the five banks, but it is also seen as the most contentious of the five banks. With previous scandals, the lowest revenues, and previous battles between investors and the company over executive compensation, make this the most risky to hold of the banks.

NYSE Price (June 7)

$76.06

52-week range

$69.16 - 97.97

Annualized dividend payout

$4.36

Dividend Yield

4.61%

Average price target

$82.44

Final report card

Canada has garnered a reputation for having some of the strongest and best-regulated banks in the world, and at face value it can be daunting for investors looking to narrow down which of these banks would be best for their portfolios. Some offer growth, other international exposure and others a steady rate of return, below is my final report card on the Q2 2015 earnings season.

Best Overall = RBC

Best for growth in Canada = RBC

Best for growth in the U.S. = TD

Best for international growth = Scotiabank

Best for short-term stock growth = Scotiabank

Best dividend yield = CIBC.

Disclosure: The author is long RY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.