Looking beyond Canada’s big five banks

Canada’s big five banks dominate the investing public’s attention when it comes to choosing financial stocks. But the next tier often offers interesting investing opportunities based on regional factors that may influence the performance of these banks. The MoneyLetter recently reviewed analysts’ reports on the sixth and tenth largest Canadian banks.

Canadas_Big_Five_BanksEdmonton-based Canadian Western Bank (Canada’s tenth largest bank in terms of assets) is focused on, not surprisingly, Western Canada. It specializes in commercial loans, energy loans, construction and real estate project financing, and industrial equipment financing. It also offers retail banking.

With financial results exceeding expectations and trends improving, CIBC analysts Robert Sedran, Marco Giurleo and Christopher Bailey say things are looking up for Canadian Western Bank (TSX—CWB). The analysts realize there may yet be the odd bump in the road as oil-sensitive provinces to which this bank is most exposed take time to adjust, though the performance elsewhere is making up for it and pushing earnings estimates higher. The analysts give the stock an ‘outperform’ rating.

The third-quarter 2017 earnings results “exceeded expectations largely owing to an improvement in the net interest margin where we had forecast a small decline after it surged last quarter, and an improvement in loan losses, where we had forecast stable losses. On the margin front, the performance and the outlook are encouraging. Partly helped by the higher interest rates and partly by the ongoing evolution of its deposit mix, the margin was up and, more importantly, management anticipates that more gains are possible here, especially if the Bank of Canada increases rates once more this year as the market is assuming. With 90 per cent of revenues coming from net interest income, this is a powerful potential lever.”

The analysts say: “The performance is largely due to efforts to improve mix on both sides of the bank’s balance sheet. On funding, management has focused on sourcing more deposits from its branch networks. While the bank leaned on non-branch sources more this quarter, branch-raised deposit growth is still up six per cent year-over-year, which compares very favourably to (negative) non-branch-sourced deposit growth of minus nine per cent.”

National Bank: often grouped with ‘Big 5’ as part of ‘Big 6’

Montreal-based National Bank (Canada’s sixth largest bank in terms of assets) may be smaller than the competing Big Five large-cap banks, but BMO Capital Markets analyst Sohrab Movahedi finds value in this stock (TSX—NA). The analyst gives National Bank a ‘market perform’ rating.

With 443 branches nationwide, National Bank provides a full range of personal, commercial, and corporate banking services. Approximately 80 per cent of its Canadian loans are based in Quebec and Ontario. National also has a growing international and specialty consumer finance business. Brokerage and underwriting services are offered through National Bank Financial.

National Bank’s adjusted EPS (earnings per share) of $1.39 was five per cent ahead of analyst expectations of $1.33.

Contributing to this were much stronger operating leverage in personal and commercial banking and stronger revenue contribution from its US subsidiary, Georgia-based Credigy, a specialty finance company in the consumer receivables market. Expense discipline and favourable revenue trends helped with National Bank’s overall operating leverage of 460 basis points in the quarter.

Earnings of $42 million, primarily reflected Credigy at $32 million versus $15 million last year. Credigy’s average assets were up 41 per cent to $6 billion, with a fifth consecutive quarter of improving revenue yields.

Management expects Credigy’s contribution to remain at current levels for the next two to three years, “which by our estimates puts it well ahead of its 2020 profits targets”.

Wealth Management saw another strong quarter with earnings of $112 million, up 29 per cent on 12 per cent higher revenue. Fee-based revenue increased by 15 per cent and 10 per cent higher assets under management.

“Our fiscal 2018 EPS increased by approximately two per cent to $5.65, primarily due to a higher Credigy contribution and more aggressive share buybacks.”

This is an edited version of an article that was originally published for subscribers in the October 2017/First 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