Canadian banks post good earnings in Q3

Stocks for the Big Six are trading at modest discounts.

Eric Compton 31 August, 2018 | 5:00PM
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Eric Compton: The big six Canadian banks reported third quarter earnings which were, on the whole, good once again. Adjusted earnings per share growth was 11% on average, credit quality remained excellent, and overall management outlooks have not waivered.

This quarter it was Bank of Nova Scotia recording one-time charges, largely related to the bank’s string of acquisitions, hurting both results and the bank’s share price post earnings. Since the second half of 2017 we have expected Scotiabank to underperform, which has happened. We don’t see the bank gaining much positive momentum over the short to medium term, as their current spate of acquisitions won’t turn accretive until 2020. Contrast that with Toronto Dominion’s latest acquisition of alternative asset manager Greystone, which will turn accretive in year one based on adjusted results. We like the progress CIBC has made each quarter this year. We highlighted the bank as undervalued last quarter, and shares have outperformed peers since. The bank saw the second highest growth in assets under management, solid capital markets revenue growth, and returns on equity remain top tier, exceeding 17%. We also like that the bank’s loan growth, specifically its mortgage loan growth, is moderating. The strength of the bank’s mortgage loan portfolio will be its big test as the credit cycle eventually turns, given the bank has the most exposure to the Canadian real estate market.

Overall, with the appreciation in CIBC’s shares, the undervaluation we previously saw has now decreased below 10%. Also, given Scotiabank’s underperformance, we now view shares as fairly valued. We still view shares in the other four banks as relatively fairly valued, and none of the Canadian banks trade at greater than a 10% difference from our current fair value estimates.

Housing markets in Canada have slowed, but still appear relatively stable. Canada is now caught in a tough position, where inflation is creeping above the 2% mandate, but increasing the target rate will only put more pressure on the already heavily indebted Canadian household. On the positive side, the consumer debt service ratio has stabilized based on the most recent data. Right now, Canada has struck a decent balance, but this drama is far from over. We view increasing rates at too fast of a pace as a serious risk, but still lean towards a manageable landing scenario for Canada for now.

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Eric Compton

Eric Compton  Eric Compton is an equity analyst for Morningstar,

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