Loan demand is down and defaults are rising but the big six Canadian banks are well-positioned to weather the storm in the energy-producing areas of the country. In the meantime, the resultant pressure on the share prices of Canadian bank stocks has produced attractive value.
Fear that oil prices will remain low for a prolonged period continues to weigh heavily on the prices of Canadian bank shares. Low oil prices are currently causing economic weakness in the energy-producing areas of the country, threatening business activity and employment. The longer such economic weakness carries on, the more likely it is that bank profits will suffer from lower demand for loans nationwide, as well as the defaults of existing loans to Canadian energy companies and homeowners.
Despite this, we think Canadian banks are financially well positioned to weather a further slowdown in economic activity, and thrive when conditions improve. Meanwhile, banks stocks seem undervalued to us, and we view them as attractive buys for long-term growth and income.
Take National Bank of Canada (TSX─NA), for example. It’s the sixth-largest bank in Canada, and the leading bank in Quebec.
The bank achieved steady growth across its three business segments in fiscal 2015. For the year ended Oct. 31, 2015, National Bank made $1.7 billion (adjusted), or $4.70 a share, compared with $1.6 billion, or $4.48 a share, in the same period of 2015.
Net income at the Personal and Commercial segment rose six per cent to $725 million. Wealth Management’s net income rose five per cent to $327 million. And at Financial Markets, net income was $718 million, up 18 per cent.
National Bank’s growth prospects in fiscal 2016 are modest at best. But we like the bank’s plans to expand beyond the Quebec market. It has launched several initiatives that leverage its strengths, including further commercial lending penetration in specialty markets where it has experience.
National Bank should earn $4.74 a share in fiscal 2016. The stock trades at just 9.0 times that estimate. The annual dividend, recently increased to $2.16 from $2.08 a share, yields 5.0 per cent. Buy.
RBC posts record profit
Royal Bank of Canada (TSX─RY) earned a record $10 billion in fiscal 2015, up 11 per cent from the previous year, reflecting strength across the bank’s businesses. The bank met all of its financial objectives, including earnings per share (EPS) growth. Diluted EPS growth for the year was 12.2 per cent, above the bank’s target of seven-per-cent plus.
Royal Bank is the largest bank in Canada measured by assets and market capitalization.
For the year ended Oct. 31, 2015, Royal Bank made $10.1 billion, or $6.73 a share, compared with $9.0 billion, or $6.00 a share, in the same period of 2014. Results were mostly driven by higher earnings in Personal & Commercial (P&C) Banking, Capital Markets and Investor & Treasury Services. P&C earnings rose 11.9 per cent to $5.0 billion, mainly because of solid volume growth across most businesses in Canada, strong fee-based revenue growth, and higher earnings in the Caribbean.
EPS growth is likely to be modest this year. But the bank is an appealing investment for its leading position in several markets.
Royal Bank trades at an attractive 11.0 times its likely fiscal 2016 earnings of $6.86 a share. And its annual dividend of $3.24 a share yields a generous 4.3 per cent.
Royal Bank is a buy for growth and income.
TD achieves its financial objectives
Toronto-Dominion Bank (TSX─TD) achieved all its financial objectives in fiscal 2015. First, the bank sought to deliver above-peer-average total shareholder return. It did so, with a total return of 0.4 per cent versus the Canadian peer average of -2.7 per cent. The bank also wanted to grow its earnings per share (EPS) by seven to 10 per cent. EPS growth was eight per cent for the year.
TD is the sixth-largest bank in North America by branches and serves more than 24 million customers in three key businesses operating in a number of locations in financial centres around the globe: Canadian Retail, U.S. Retail, and Wholesale Banking.
For the year ended Oct. 31, 2015, TD made $8.8 billion (adjusted), or $4.61 a share, compared with $8.1 billion, or $4.27 a share, in the same period of 2014. The increase was due to higher earnings in the Canadian Retail, U.S. Retail and Wholesale Banking segments.
Canadian Retail adjusted income rose 8.2 per cent to $5.9 billion, primarily caused by loan and deposit volume growth, good wealth asset growth, strong credit performance, and higher insurance earnings.
Adjusted net income at U.S. Retail rose 20.7 per cent (5.9 per cent in U.S. dollars) to $2.5 billion, primarily because of strong loan and deposit growth, lower provision for credit losses, good expense management and the impact of foreign currency translation.
We think TD bank has a better business mix than its peers. With more than a quarter of its earnings coming from U.S. banking, the bank is better positioned than a number of its domestic rivals to withstand a setback in Canadian banking.
TD’s shares yield 3.9 per cent. The stock trades at an attractive 11.7 times forecast fiscal 2016 earnings of $4.82 a share. TD Bank is our best buy among the Canadian banks for growth and income.
Money Reporter, MPL Communications Inc.
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