The five major Canadian Banks reported fourth-quarter earnings at the end of November, and with the exception of the Royal Bank of Canada (NYSE:RY), all of them managed to deliver strong year-over-year income growth.
Together, the big five generated $35.7 billion CAD in net income in fiscal 2016, 7.5% higher than a year earlier. Long known for their healthy dividends, 2016’s results should provide investors with plenty of confidence heading into 2017.
Interestingly, the banks already know this.
The top five shareholders of each of the banks — with the exception of Fidelity, which makes it into the top five of Toronto-Dominion Bank (NYSE:TD) — are the banks or their asset management subsidiaries.
When it comes to Canadian stocks to buy, the big five should be amongst your top picks, despite the headwinds they’re expected to face in the coming year.
As they continue to test record highs heading into the last two weeks of the year, the big Canadian banks remain some of the best stocks to buy — not just in Canada, but in the U.S. as well.
Canadian Stocks to Buy: Bank of Nova Scotia (BNS)
Year-to-Date Return: 44%
Dividend Yield: 3.9%
Bank of Nova Scotia (NYSE:BNS) stock had the poorest performance of the big five Canadian banks in 2015, down 24.5%; shareholders have to be pleased with this year’s performance, the best of the bunch.
In the fourth quarter, BNS generated net income of $2 billion CAD, 9.1% higher than in Q4 2016. Net income for the entire year was $7.4 billion CAD, $200 million higher than in 2015.
Bank of Nova Scotia is known for its emerging markets business, especially in Latin America, where it does business in Mexico, Chile, Peru and Colombia. In 2016, its international banking business delivered more than $2 billion in earnings, a company record.
Currently yielding 3.9%, BNS upped its dividend twice in 2016 delivering 6% additional shareholder growth for shareholders.
I’m a big believer in the future of business in Latin America. Bank of Nova Scotia’s focus on this market makes it my second favorite Canadian bank.
Canadian Stocks to Buy: Bank of Montreal (BMO)
YTD Return: 30%
Dividend Yield: 3.6%
Net income for Bank of Montreal (USA) (NYSE:BMO) grew 10.8% in the fourth quarter to $1.4 billion CAD. For all of 2016, BMO generated $4.6 billion in net income and $5 billion on an adjusted basis, the first time in its history to hit this important figure.
BMO has been in business for 200 years. As it celebrates this important anniversary in 2017, it’s important to remember that it has one of the strongest and most diversified business models of any of the big five Canadian banks.
Its Canadian Personal and Commercial banking segment accounted for 40% of its overall adjusted net income in 2016; U.S. P&C another 21%; Capital Markets 23%; and its Wealth Management segment the remaining 16%.
BMO’s Wealth Management unit includes exchange-traded funds.
In 2016, through the end of October, BMO ETFs had 29.9% market share in Canada, a 260 basis point increase from the end of 2015. Only BlackRock, Inc. (NYSE:BLK) had more at 47.8%, 460 basis points lower than the end of 2015. It’s taking market share in Canada.
Although the bank currently generates 69% of its adjusted net income in Canada, it continues to build out its U.S. banking and wealth management platform with acquisitions like the one it made this past summer when it purchased Minneapolis-based M&A advisory firm Greene, Holcomb Fisher. Look for more acquisitions in the future.
Canadian Stocks to Buy: Canadian Imperial Bank of Commerce (USA) (CM)
YTD Return: 29%
Dividend Yield: 4.4%
Except for TD, Canadian Imperial Bank of Commerce (USA) (NYSE:CM) had the best fourth quarter growth in net income, up 19.7% to $931 million CAD. For the entire 2016, it generated $4.3 billion in net income, 19.4% higher than 2015.
What’s it doing to grow at such a clip? It’s blasting through all the corporate targets it’s set for itself. For example, it looks to grow diluted earnings per share by 5% to 10% annually; it grew them 21% in 2016.
Return on equity is an important figure in banking. CIBC has a corporate target of 18% to 20%. In 2016, it hit the top of that range at 19.9%. “In 2016, CIBC delivered record net income, industry-leading capital strength and the highest return on equity of the major North American banks,” CEO Victor Dodig stated in its Q4 2016 press release.
Here in Canada, CIBC catches a lot of flak for its exposure to the Canadian housing market. Analysts believe it has too many uninsured mortgages and home equity loans compared to its peers. Should a U.S.-style housing correction happen at some point in the future, CIBC would hit the hardest.
However, CIBC management is adamant that the credit profile and quality of its uninsured mortgages are excellent, especially in Vancouver and Toronto, two of the most expensive cities to own a house in North America.
As a result of this exposure, not to mention it is the smallest of the big five banks, CIBC trades at a much lower price-earnings multiple to its Canadian and U.S. peers.
If you’re a value investor, this is the Canadian bank stock to buy.
Canadian Stocks to Buy: Royal Bank of Canada (RY)
YTD Return: 28%
Dividend Yield: 3.6%
The Royal Bank of Canada is Canada’s biggest bank and some would argue its best.
That said, its fourth quarter results were the worst of the big five Canadian banks, with net income down 1.9% to $2.5 billion CAD. However, its net income in fiscal 2016 managed to grow by 4.3% to $10.5 billion, or 27.3% of its annual revenue of $38.4 billion.
Royal Bank’s annual numbers aren’t all that bad but when you realize that it’s return on equity in 2016 dropped by 230 basis points to 16.3%, investors should question whether it is the best of the Canadian bank stocks to buy.
Sure, compared to American banks which average 9% ROE, RY looks great at 16.3%. However, you can buy Canadian Imperial Bank of Commerce at 10.5 times earnings compared to 13.3 times earnings for Royal Bank. This despite the fact CIBC’s got a return on equity of 19.9%, 360 basis points higher than Royal Bank.
It’s not all bad news for Canada’s biggest bank.
The biggest plus at Royal Bank is the continuing evolution of its wealth management business, especially in the U.S., where its $5 billion acquisition of City National has made it a player south of the border. In the fourth quarter, City National contributed 22% of the bank’s wealth management business.
When it comes to assessing Canadian stocks to buy, and banks in particular, the City National buy is not enough to merit consideration in my opinion.
Canadian Stocks to Buy: Toronto-Dominion Bank (TD)
YTD Return: 27%
Dividend Yield: 3.3%
Toronto-Dominion Bank (NYSE:TD) delivered the best Q4 earnings of the five big banks, up 25.2% year-over-year to C$2.3 billion. For the entire year, its net income increased a more subdued 11.2% to $8.9 billion CAD.
What is TD doing that puts it head and shoulders above its banking peers?
It’s U.S. retail banking operations continue to grow at double-digit rates making it the big growth engine for the bank. In Q4 2016, U.S. Retail Bank saw net income increase by 26% on a reported basis and 14% on an adjusted basis.
The growth itself is a result of higher loan volumes and fee income; the 12 percentage point difference between reported and adjusted net income is due to non-interest income recorded in the quarter as a result of the bank’s purchase of Nordstrom’s $2.2 billion credit card portfolio in late 2015.
TD’s U.S. Operations generated 30% of its net income in fiscal 2016 and that number continues to grow. In late October, TD announced that TD Ameritrade Holding Corp. (NASDAQ:AMTD), its 41%-owned equity investment, was buying Scottrade Financial Services for $4 billion; TD Ameritrade would then turn around and sell Scottrade’s banking operations to TD for $1.3 billion.
TD and BMO are in a neck and neck competition for the title of Canada’s biggest U.S. Bank. How it turns out is still to be determined. However, for me, the two best Canadian bank stocks to buy are Canadian Imperial Bank of Commerce and Bank of Nova Scotia — in that order.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.