The big six Canadian banks reported second quarter earnings which were, on the whole, good. Most of the banks beat consensus, credit quality stayed strong, and management outlooks remained steady. Despite a few lingering issues, we are generally positive on the Canadian banks after this round of earnings.
Our fair value estimates increased for Royal Bank of Canada, Toronto-Dominion, Bank of Nova Scotia, and for National Bank of Canada, while remaining unchanged for Bank of Montreal and Canadian Imperial Bank of Commerce. The most undervalued bank we see in Canada today remains CIBC, although we also note that CIBC has the most exposure to the Canadian housing market, adding to its inherent risk.
Adjusted returns on equity were generally up for the banks in the current quarter, with all six recording values above 17%. Adjusted earnings per share growth was generally in the double digits, except for ScotiaBank, while expense growth was kept in the low to mid -single digits for most of the banks.
BMO continued to record fairly poor unadjusted results, this time with a one-time restructuring charge, however we note that BMO has historically been one of the less efficient operators among the big six, and if these charges can make them more efficient over the long term, it will be money well spent.
Another theme of the quarter was slowing mortgage growth given the effects of new mortgage regulations. This fits well within our existing Canadian housing thesis, which calls for a relatively soft landing, slowing growth in general as indebted consumers de-lever, and a manageable turning of the credit cycle as losses pick up over the next 3 years.
We still see value in shares of CIBC, as long as the bank can do even an average job through the next housing downturn. And shares of National Bank of Canada, which often has some of the highest returns on equity among peers, may provide some value at today’s prices as well.
