The MoneyLetter recently took a look at four financial stocks—two of the big five Canadian banks, a financial services and asset manager and a global life insurance stock. Three of these financial stocks are ‘buys’, but we’ve put one on ‘hold’ because of the challenges it faces in its regulatory and competitive environment.
Shares of Bank of Montreal (TSX—BMO; NYSE—BMO) have appreciated nearly 20 per cent since their November lows when Donald Trump won the U.S. presidency. His pro-growth agenda, as well as improved U.S. economic growth, has created an expectation that inflation, and therefore interest rates, will rise, which is good for banks’ bottom lines. Hence, North American bank stocks have risen substantially in recent months.
Bank of Montreal is particularly well positioned to benefit from more robust U.S. economic growth. After all, in 2016, nearly 23 per cent of the bank’s adjusted net income came from its U.S. personal and commercial operations. The bank, which is Canada’s fourth-largest by market capitalization, serves customers in six U.S. Midwest states—Illinois, Indiana, Wisconsin, Minnesota, Missouri and Kansas.
Financial results for the first quarter were good. For the three months ended January 31, 2017, BMO made $1.5 billion (adjusted), or $2.28 a share, compared with $1.2 billion, or $1.75 a share, in the same period of 2016. The most recent results included a gain from debit and credit card payments processor Moneris Solutions Corp. This added $0.20 to earnings per share.
Earlier in the first quarter, BMO raised its quarterly dividend 2.3 per cent to $0.88 a share. Notably, the bank has the longest-running dividend payout record of any company in Canada, at 188 years.
Bank stock valuations, based on estimated fiscal 2017 price-earnings ratios, are nearing their highest levels since the 2008 to 2009 financial crisis. But they’re still comfortably below their peak valuations of the past 10 years. This, along with the banks’ moderate earnings growth potential, which should support similar dividend growth, makes their stocks worthwhile from a total-return perspective.
BMO’s earnings should rise to $8.07 a share in fiscal 2017 (year ends October 31) from $6.92 in fiscal 2016. The stock trades at a reasonable 12.4 times the 2017 estimate. Its annual dividend of $3.52 a share also yields a relatively attractive 3.5 per cent. Bank of Montreal is a blue chip bank stock to buy for long-term growth and income.
CIBC and PrivateBancorp
Canadian Imperial Bank of Commerce (TSX—CM; NYSE—CM) and PrivateBancorp (NASDAQ—PVTB) have entered into an amended merger agreement. The new agreement values PrivateBancorp at about US$4.9 billion, a 20-per-cent increase in the value announced last June. The higher price reflects improved markets and higher interest rates than was the case back then.
The merger will give CIBC some U.S. exposure. PrivateBancorp delivers customized business and personal financial services to mid-market companies, as well as business owners, executives, entrepreneurs and families in all the markets and communities it serves. At the end of 2016, the company had 36 offices in 13 states and US$20.1 billion in assets.
CIBC had a strong first quarter. For the three months ended Jan. 31, 2017, the bank made $1.2 billion (adjusted), or $2.89 a share, compared with $1.0 billion, or $2.55 a share, in the same period of 2016. The bank delivered strong performance across retail and business banking, wealth management and capital markets.
We think the higher price CIBC will pay for PrivateBancorp is justified because it will let the bank continue its U.S. expansion strategy, a necessary move if it is to diversify and to move away from the Canadian market and the potential of a housing downturn.
CIBC should earn $10.71 a share in fiscal 2017 (ends October 31). The stock trades at 10.8 times that estimate. Its current annual dividend of $5.08 a share yields 4.4 per cent.
CIBC is a bank stock to buy for income and some growth.
Challenges for CI Financial
Financial services and asset management company CI Financial Corp. (TSX—CIX) faces an increasingly challenging and competitive environment. The company has had to, and will continue to, face a number of headwinds, including ongoing regulatory changes, the federal government’s decision to end the tax benefit of corporate-class mutual funds, slowing industry sales, intensifying pressure on fees, and the growth of passive investment strategies and robo-advisors.
Fee pressures contributed to disappointing financial results last year. For the year ended Dec. 31, 2016, CI Financial made $532.1 million, or $1.96 a share, compared with $563.7 million, or $2.02 a share, in 2015. The decrease was primarily due to a decline in management-fee revenue as well as an increase in selling, general and administrative expenses. Revenues from management fees declined 2.2 per cent, to $1.7 billion.
In addition to facing the headwinds noted above, CI has also suffered from net redemptions lately. In fact, net redemptions were $5.9 billion in 2016. We would like to see a turnaround in this situation, as well as greater clarity on some of the issues noted above, before changing our recommendation on this stock. Continue to hold CI Financial for now.
Manulife Financial Corp. and John Hancock
Manulife (TSX—MFC; NYSE—MFC), a Canadian life insurance company and financial services provider, reached $4 billion in core earnings, up 17 per cent from the prior year. By reaching this amount, the company met a target it set back in 2012. But it failed to reach its net income target, due to higher interest rates (usually a positive factor for the company over the long term), which negatively impacted market movements in the final quarter of the year.
Manulife is a leading international financial services stock. The company operates as John Hancock in the U.S. and Manulife elsewhere.
Manulife Financial is a global financial stock to buy for growth and income.
This is an edited version of an article that was originally published for subscribers in the April 2017/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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