The big five banks face headwinds in 2019

Growth in revenue and earnings for the big five Canadian banks may be more difficult in 2019. The spread on interest rates between their borrowing costs and income is narrowing; borrowers’ mortgage eligibility rules are tightening; and low oil prices are threatening oil producing companies and, consequently, their employees.

Canada’s Big 5 banks are all ‘safe buys’ for share-price gains and growing dividends.

The big five Canadian banks face headwinds. They’re expected to earn more this year and next, but their earnings per share are expected to grow by a slower rate this year.

That’s because they likely face some headwinds in fiscal 2019. For one thing, the flattening yield curve shrinks the profits of their traditional banking businesses. The spread between what they earn on assets (such as loans) and what they pay on liabilities (such as deposits) is narrowing.

For another thing, more stringent regulations are making mortgages more difficult for consumers to obtain. This reduces profits from this lucrative market. Then, too, low oil prices could push some oil and gas companies, as well as their employees, over the brink. The banks may have to eat rising loan losses.

Bank of Montreal

In the year to October 31, Bank of Montreal, or BMO (TSX—BMO), earned $8.99 a share. This was up by a respectable 10.6 per cent from $8.13 a share, the year before.

In fiscal 2019 (which began on November 1), BMO is expected to earn $9.59 a share. This would represent moderate earnings growth of 6.7 per cent. In fiscal 2020, it’s expected to earn $10.17 a share. That would work out to slower earnings growth of six per cent. BMO faces headwinds that are common to all the big Canadian banks.

Based on this year’s earnings estimate, BMO trades at an attractively-low forward P/E (Price-to-Earnings) ratio of 9.8 times. This beats the S&P/TSX Composite’s forward P/E ratio of 14 times.

BMO, like its peers, is what’s known a ‘dividend aristocrat’. In Canada, that refers to companies that have raised their dividends for at least five years in a row. BMO pays a dividend of four dollars a share, for a healthy yield of 4.1 per cent. That beats the S&P/TSX’s yield of 3.2 per cent.

BMO remains a buy for long-term share price gains as well as high and growing dividends.

Bank of Nova Scotia

In the year to October 31, Bank of Nova Scotia, or Scotiabank (TSX—BNS), earned $7.11 a share. This was up by a decent 8.7 per cent from $6.54 a share, the year before.

In fiscal 2019, Scotiabank is expected to earn $7.49 a share. That would represent slower earnings growth of 5.3 per cent. In fiscal 2020, it’s expected to earn $8.22 a share. That would represent better earnings growth of 9.7 per cent. Scotiabank faces headwinds that are common to all the big Canadian banks.

Based on this year’s earnings estimate, Scotiabank trades at an attractive forward P/E ratio of 9.5 times. This is better than the Canadian market’s forward P/E ratio of 14 times.

Scotiabank is a ‘dividend aristocrat’. Scotiabank pays a dividend of $3.40 a share, for an appealing yield of 4.8 per cent. That beats the Canadian market’s yield of 3.2 per cent.

Scotiabank remains a buy for long-term share price gains as well as high and growing dividends.

Canadian Imperial Bank of Commerce

In the year to October 31, Canadian Imperial Bank of Commerce, or CIBC (TSX—CM), earned $12.21 a share. This was up by a decent 9.9 per cent from $11.11 a share, the year before.

In fiscal 2019, CIBC is expected to earn $12.59 a share. That would represent slight earnings growth of 3.1 per cent. In fiscal 2020, it’s expected to earn $13.14 a share. That would be modest earnings growth of 4.4 per cent. CIBC faces headwinds that are common to all the big Canadian banks.

Based on this year’s earnings estimate, CIBC trades at an attractive forward P/E ratio of 8.6 times. This beats the S&P/TSX Composite index’s forward P/E ratio of 14 times.

CIBC, like its peers, is a ‘dividend aristocrat’. CIBC pays a dividend of $5.44 a share, for a yield of five per cent, the highest of its peers. That beats the S&P/TSX Composite’s yield of 3.2 per cent.

Royal Bank of Canada

In the year to October 31, Royal Bank of Canada, or Royal (TSX—RY), earned $8.53 a share. This was up by a strong 12.7 per cent from $7.57 a share, the year before.

In fiscal 2019, Royal is expected to earn $8.96 a share. This would represent modest earnings growth of five per cent. In fiscal 2020, it’s expected to earn $9.63 a share. That would produce better earnings growth of 7.5 per cent. Royal faces headwinds that are common to all the big Canadian banks.

Based on this year’s earnings estimate, Royal trades at an attractive forward P/E ratio of 10.7 times. This is better than the Canadian market’s forward P/E ratio of 14 times.

Royal, like its peers, is a ‘dividend aristocrat’. Royal pays a dividend of $3.92 a share, for a healthy yield of 4.1 per cent. That beats the Canadian market’s yield of 3.2 per cent.

Royal remains a buy for long-term share price gains as well as high and growing dividends.

Toronto-Dominion Bank

In the year to October 31, Toronto-Dominion Bank, or TD (TSX—TD), earned $6.47 a share. This was up by a strong 16.8 per cent from $5.54 a share, the year before.

In fiscal 2019, TD is expected to earn seven dollars a share. That’s decent earnings growth of 8.2 per cent. In fiscal 2020, it’s expected to earn $7.47 a share. That’s slower earnings growth of 6.7 per cent. TD faces headwinds common to all big Canadian banks.

Based on this year’s earnings estimate, TD trades at an attractive forward P/E ratio of 10.1 times. This beats the Canadian market’s forward P/E ratio of 14 times.

TD, like its peers, is a ‘dividend aristocrat’. In Canada, that’s a company that has raised its dividends for at least five years in a row. TD pays a dividend of $2.68 a share, for a yield of 3.8 per cent. That beats the Canadian market’s yield of 3.2 per cent.

TD remains a buy for long-term share price gains as well as high and growing dividends.

This is an edited version of an article that was originally published for subscribers in the January 2019/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.