The big 5 Canadian banks will report their Q4 and fiscal 2013 results next week. Please note that Canadian banks have a fiscal year end of October 31 instead of December 31 for most US banks. Bank of Montreal (BMO) will kick-off the Canadian banks earnings season on Tuesday December 3rd. CIBC (CM), RBC (RY), TD will report on Thursday December 5th. Last but not least, Scotiabank (BNS) will wrap up the Canadian banks earnings season on Friday December 6th. The details of the earnings releases and conference calls are provided in table 1 for readers.
Table 1: Earnings Releases and Conference Call Details:
| Bank | Earnings Release Date and Time (EST) | Conference Call Time (EST) |
| BMO | December 3rd at 7:30am | 2:00pm |
| CM | December 5th at 5:30am | 7:30am |
| RY | December 5th at 6:00am | 8:30am |
| TD | December 5th at 6:30am | 3:00pm |
| BNS | December 6th at 7:30am | 2:00pm |
Source: Bloomberg Earnings Calendar
Consensus Forecast:
Analysts are looking for an average year-over-year (Y/Y) earnings increase of 5.5% from the big 5 Canadian banks. Quarter-over-quarter (Q/Q), analysts estimate a modest 0.6% increase in earnings from the prior quarter. For a comprehensive review of last quarter's earnings, please see my prior article. TD, BNS and RY are expected to report strong year-over-year earnings growth benefiting from their economies of scale and strong business franchises. For TD, it will benefit from the better operating and credit environment in the US. RY will benefit from its large Canadian operation which is likely to generate more than $1 billion in earnings again this quarter. BNS will benefit from the improving conditions in its Latin American banking divisions and increased earnings in its Canadian banking division due to the ING Canada acquisition last year. BMO is likely to report decline in earnings because of one-time benefits in the prior quarters such the low PCL ratio of 0.11% recorded in Q3 (compared to the 0.3% on average). CM is likely to report modest Y/Y earnings growth of 5.4%. However, CM's earnings are likely to decline quarter-over-quarter as its decision to sell half of the Aimia credit card portfolio last quarter will result in lower net interest income in the upcoming quarters.
Table 2: Consensus Forecast:
| Bank | Q4/13(E) | Q3/13 | Q4/12 | Implied Y/Y (%) | Implied Q/Q(%) |
| BMO | $1.58 | $1.68 | $1.65 | -4.2% | -6.0% |
| CM | $2.15 | $2.29 | $2.04 | 5.4% | -6.1% |
| RY | $1.38 | $1.46 | $1.27 | 8.7% | -5.5% |
| TD | $1.99 | $1.65 | $1.83 | 8.7% | 20.6% |
| BNS | $1.32 | $1.32 | $1.21 | 9.1% | 0.0% |
Consensus forecasts are from Reuters.com
Table 3: Consensus Annual Forecast
| Bank | FY12(Actual) | FY13(E) | FY14(E) | Y/Y(FY12-13) | Y/Y(FY13-14) |
| BMO | $6.00 | $6.17 | $6.38 | 2.8% | 3.4% |
| CM | $8.07 | $8.70 | $8.52 | 7.8% | -2.1% |
| RY | $5.00 | $5.56 | $5.89 | 11.2% | 5.9% |
| TD | $7.42 | $7.54 | $8.47 | 1.6% | 12.3% |
| BNS | $4.77 | $5.13 | $5.54 | 7.5% | 8.0% |
| Average | 6.2% | 5.5% |
Consensus forecasts are from Reuters.com
Valuation:
Table 4 contains an updated trading multiples for each of the big 5 Canadian banks. On aggregate, the big 5 Canadian banks are trading at 11.5 times 2014 estimated earnings and 2.1 times book. These measures do not signal significant overvaluation or undervaluation (See graph 1 Below on historical price to book ratios).
Table 4: Trading Multiples of Big 5 Banks
| BMO | BNS | CM | RY | TD | |
| Price(on TSX Nov.29) | $73.61 | $65.21 | $91.09 | $70.44 | $96.78 |
| P/E (T12M) | 11.7 | 12.9 | 10.6 | 13.1 | 13.1 |
| P/E (N12M) | 11.5 | 11.8 | 10.7 | 12.0 | 11.4 |
| P/BV (MRQ) | 1.7 | 2.0 | 2.3 | 2.4 | 1.9 |
| P/TBV (MRQ) | 2.2 | 2.8 | 2.7 | 3.2 | 2.9 |
Source: All data from Bloomberg as of November 29,2013. T12M is trailing 12 months, N12M is next 12 months, MRQ is most recent quarter, BV is Book Value and TBV is Tangible Book Value
Graph 1: Historical Big 5 Average P/B Multiple (10-years)
(click to enlarge)
Source: Bloomberg Data
Looking at the share performance of the big 5 Canadian banks, BNS experienced the best 1 month and 3 month return partly due its lagging performance during the first half of the year. TD, on the other hand, lagged peers in the 1 month and 3 month returns, but the underperformance is likely temporary. As shown in table 4, TD is trading at the lowest forward earnings multiple and price to book multiple compared to peers despite the bank has the highest growth potential in its U.S. retail banking division.
Overall, I still favor TD and BNS as outlined in the previous article. Back in late-August, BNS had the lowest earnings and book multiple and it had best 1 month and 3 month returns. Another laggard back in August was BMO, which also had stellar returns in the past 3 months. Due to mean reversion, I expect TD's shares to perform well in the next 3-6 months since it has lagged peers in the past 3 months. I will re-visit my investment thesis for each of the big 5 banks after they report earnings next week.
Table 5: Price Return of the Big 5 Canadian Banks
| Return | BMO | BNS | CM | RY | TD | Avg. |
| 1M | 1.4% | 2.9% | 2.7% | 0.6% | 1.2% | 1.7% |
| 3M | 12.5% | 12.6% | 12.0% | 9.6% | 9.0% | 11.1% |
| 6M | 19.9% | 10.5% | 16.3% | 14.5% | 15.2% | 15.3% |
| 1Y | 23.4% | 16.4% | 13.6% | 19.6% | 16.6% | 17.9% |
| 3Y | 22.3% | 22.5% | 15.2% | 28.2% | 29.6% | 23.6% |
| 5Y | 93.7% | 76.2% | 85.9% | 63.1% | 110.4% | 85.9% |
| 10Y | 37.8% | 103.5% | 44.4% | 128.3% | 136.3% | 90.1% |
Source: Yahoo Finance as of November 29,2013
Conclusion:
The big 5 Canadian banks will likely report single digit earnings growth in Q4. The credit environment is favorable in both Canada and US, which will benefit the retail operations of the big 5 banks. Capital markets segments may show some weakness, in particular fixed-income trading. Nonetheless, the Q4 results overall should show modest earnings growth with limited surprises to Canadian bank investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Additional disclosure: This article is for informational purposes only and does not constitute an offer to buy or sell any securities discussed in the article. The stock mentioned in this article does not represent financial advice. The target price presented in this article is based on current information and are subject to change without further notice. Investors are recommended to conduct further due diligence before committing capital to any investment.
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