Canaccord
Bank of Montreal* (BMO : TSX : $61.48), Net Change: -0.14, % Change: -0.23%, Volume: 1,661,005 Bank of Nova Scotia* (BNS : TSX : $58.20), Net Change: -0.55, % Change: -0.94%, Volume: 2,256,708 CIBC* (CM : TSX : $78.05), Net Change: -0.49, % Change: -0.62%, Volume: 1,673,585
National Bank of Canada* (NA : TSX : $74.11), Net Change: -0.39, % Change: -0.52%, Volume: 482,869 Royal Bank of Canada* (RY : TSX : $60.85), Net Change: -0.68, % Change: -1.11%, Volume: 2,025,943 TD Bank* (TD : TSX : $82.15), Net Change: -0.49, % Change: -0.59%, Volume: 2,016,123
So – what's the problem? Canada's six large banks report Q2/13 results from May 23 to May 30. Canaccord Genuity Financials Analyst Mario Mendonca forecasts industry EPS coming in at 6-7% YoY, below last quarter's 9% YoY EPS growth. High single-digit growth last quarter reflected very good CMRR (Royal Bank, Bank of Montreal), Bank of Nova Scotia's acquisition of ING Direct, lower credit losses (CIBC and TD) and strong operating leverage (BNS and RY). Mendonca's forecasted 7% YoY EPS growth for Q2/13 reflects 3-4% revenue growth, 1% operating leverage and a 7% decline in PCLs. All banks but National exceeded Mendonca‘s EPS estimates in Q1/13. Mendonca says what is truly odd about relative valuation is that Canada's banks now trade at a lower dividend yield than the life insurers (4.2% versus 4.0%). All banks are raising dividends, most banks twice annually, and dividend growth is averaging 9% annually, with TD leading at 13%. At the current pace of increases and assuming no change in stock prices, the bank dividend yield will be through 5% by early 2014. To put this in context, the bank dividend is headed toward 2.6-times that of the 10-year bond yield, and, importantly, during the worst financial crisis since the Great Depression – no bank cut its dividend. Conversely, the insurers have not raised dividends since H1/08, and, given where their leverage ratios are (30% versus 25% before the crisis), we do not see the insurers raising dividends, at the earliest until 2014 - probably late 2014. So - what's the problem? Mendonca suggests that markets are expecting a slow-growing Canadian economy to be a real anchor on the banks, while the insurers, with their international exposure, are poised for materially better growth. Mendonca notes this last point may be only true for Manulife but it is hardly true for the other insurers. What's more, bank estimates already reflect a much slower growth environment. Mendonca continues to believe that BNS, RY and TD will deliver superior earnings growth. The reporting schedule is as follows: TD (May 23) NA (May 24), BMO (May 29), BNS (May 28), CM (May 30) and RY (May 30). Another way to own the Canadian banks, on an enhanced yield basis, is through the BMO Covered Call Canadian Banks ETF (ZWB). This ETF holds the big six Canadian banks at essentially the same weights and writes covered call options to enhance yield. At yesterday's close ZWB had a yield of ~5.8%.