Banks What are we looking for?
Canadian Schedule 1 banks begin reporting fourth-quarter results this week. Where do the valuations of domestically owned, federally regulated banks stand in this rising rate environment?
The screen
We used StockCalc’s screener to select the top 10 listed Schedule 1 bank stocks by market capitalization on the TSX. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
- An adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
If we have analyst coverage, we look at the consensus target price.
While not shown, as part of the valuation process for banks we consider net interest margin (difference between interest income and interest expense). We also look at price-to-book and return-on-equity ratios. Price-to-book is inherent in our ABV calculation, which is a dominant valuation model for banks and other businesses such as insurance or real estate.
More about StockCalc
StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30, which offers a 30-day free trial and special pricing for the second month.
What we found
Top 10 TSX-listed Schedule 1 banks, by market cap
| NAME | TICKER | MKT. CAP. ($ MIL.) | RECENT CLOSE ($) | STOCKCALC VAL. ($) | DIFF. (%) | DCF VALUE ($) | PRICE COMPS ($) |
| Royal Bank of Canada | RY-T | 172,850.5 | 134.81 | 136.53 | 1.3 | 204.31 | 106.40 |
| Toronto-Dominion Bank | TD-T | 157,159.9 | 91.02 | 91.33 | 0.3 | 144.75 | 83.07 |
| Bank of Montreal | BMO-T | 83,108.4 | 132.12 | 139.16 | 5.3 | 224.00 | 115.55 |
| Bank of Nova Scotia | BNS-T | 79,270.0 | 71.36 | 79.85 | 11.9 | 154.04 | 77.67 |
| CIBC | CM-T | 54,118.1 | 65.10 | 69.50 | 6.8 | 316.98 | 66.53 |
| National Bank of Canada | NA-T | 29,996.6 | 99.13 | 102.80 | 3.7 | 187.58 | 76.60 |
| Canadian Western Bank | CWB-T | 2,150.0 | 25.84 | 30.37 | 17.5 | 34.86 | 30.37 |
| EQB | EQB-T | 1,613.7 | 57.66 | 62.47 | 8.3 | 287.09 | 43.24 |
| Laurentian Bank of Canada | LB-T | 1,313.8 | 33.67 | 34.63 | 2.9 | -9.88 | 23.69 |
| VersaBank | VBNK-T | 263.4 | 8.93 | 10.26 | 14.9 | 19.92 | 18.53 |
You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc Valuation column is a weighted calculation derived from the models and analyst target data if used.
All of the stocks on this list pay a dividend and all, except Royal Bank of Canada, are down over the past 12 months (excluding dividends). Let’s look at two examples.
Our valuation for Bank of Nova Scotia, which reports its fourth-quarter results on Tuesday, is 11.9 per cent higher than its recent price, which is the biggest percentage different among the Big Five. All of our models, as well as analyst consensus, are 9 per cent or more above the bank’s price. Scotiabank also has the highest dividend yield on this list. It announced in September that Scott Thomson will be the bank’s new CEO effective Feb. 1, 2023. This is an uncommon move in the sector given Mr. Thomson comes from Finning International Inc., and not from within Scotiabank, although he’s been sitting on the bank’s board since 2016.
VersaBank, the smallest bank on our list, is based in London, Ont. It is a digitally focused financial institution addressing underserved segments as well as established corporations and public sector entities in the Canadian banking market. Our adjusted book value for VersaBank is just above the recent price, with the rest of our models and analyst consensus much higher. Among the banks on this list, its stock price has declined the most in the past year and its dividend yield is the lowest. VersaBank will release its fourth-quarter results on Dec. 7.