Canadian banks report earnings this week, starting with Bank of Nova Scotia and Bank of Montreal on Tuesday, Royal Bank of Canada and National Bank of Canada on Wednesday, and Toronto Dominion Bank on Thursday. The numbers so far have come in above expectations, despite fears of the Delta Variant of the coronavirus causing some concerns about performance earlier.
Here is what our analysis of the results so far.
Bank of Montreal (BMO)
Narrow-moat rated Bank of Montreal reported excellent fiscal third-quarter earnings, with EPS of $3.44 representing solid year-over-year growth compared with adjusted EPS of $1.85 last year and higher than last quarter’s EPS of $3.13. Provisioning continues to be a major driver of improved earnings, coming in at a net benefit of $70 million, a multi-year low and materially lower than the $1.1 billion charge the bank took in the third quarter of 2020. This aligns with our view that the Canadian banks will be fine from a credit perspective and that better results should be the norm going forward. We still expect the return of fee growth and much lower provisions to drive solid earnings growth for the rest of the year, while the lack of a boost from lower provisioning will make for tougher comps for the Canadian banks in 2022. Bank of Montreal's fees continue to come in better than we were expecting. After decreasing our credit cost projections for 2021, decreasing certain expense line items, increasing some noninterest income items, and making some additional improvements to our balance sheet growth and net interest margin outlook, we have increased our fair value estimate to $130 per share.
Net income continued to be exceptional in the bank's capital markets segment during the third quarter, tracking above $500 million yet again as investment banking remained healthy while global markets-related revenue came back down a bit. We wouldn't be surprised if strong investment banking revenue persists for at least another several quarters. There is some uncertainty around what a normalized run rate looks like for this segment, with management providing little guidance here when asked about it on the call. This introduces some uncertainty into our projections, where we expect some pullback in both investment banking and trading-related fees, however, we expect both to normalize at run rates that are above 2019.The wealth segment also continued to report excellent results, with net income up another 15% sequentially, although growth in assets under management is starting to slow, up less than 1% sequentially.
The more traditional banking segments at Bank of Montreal have continued to do fine, with Canadian P&C essentially fully recovered and back to prepandemic revenue levels while U.S. P&C is feeling a bit more pressure from a $perspective due to shifting exchange rates. Canada seems on pace to begin raising rates in the second half of 2022 while the timing in the U.S. is a bit cloudier. In any case, we expect eventual support for yields while we also expect balance sheet growth to resume in 2022.
Credit costs remained solid. Provisioning continued to decline during the third quarter while the bank continues to hold excess reserves for future credit losses. The allowance for performing loans sits at 57 basis points, well above the mid-30s before the pandemic. Formations of impaired loans remained subdued, and overall gross impaired loans declined once again. Higher-risk loans due to the COVID-19 pandemic remained at just under 5% of total loans, which is very manageable.
Eric Compton, Morningstar Analyst
Bank of Nova Scotia aka Scotiabank (BNS)
Narrow-moat rated Bank of Nova Scotia reported decent fiscal third-quarter earnings. Adjusted earnings per share were $2.01, representing solid year-over-year growth compared with adjusted EPS of $1.04 in the same period a year ago and higher than last quarter’s EPS of $1.90. Provisioning continues to be a major driver of improved earnings, coming in at a cost of $380 million this quarter, a multi-year low and materially lower than the $2.2 billion charge the bank took in the second quarter of 2020. This aligns with our view that the Canadian banks will be fine from a credit perspective and that better results should be the norm going forward. We still expect the return of fee growth and much lower provisions to drive solid earnings growth for the rest of the year, while the lack of a boost from lower provisioning will make for tougher comps for the Canadian banks in 2022.
Revenue growth continued to be lackluster for Scotiabank, up only 1% year over year as the bank’s international segment remains under some pressure and fee growth for the global markets segment faced tough year over year comps. We expect international fees to continue to recover as the economic picture is improving in essentially all of Scotiabank’s Pacific Alliance countries compared with last quarter. Eventually, this economic improvement should lead to rate hikes, however, lower unsecured lending balances will likely continue to be a drag for the foreseeable future. Adjusted expenses were up only 1% compared with last quarter and were generally better than we expected. After adjusting our projections for slightly better fee growth and slightly lower expenses, we are increasing our fair value estimate to $83/USD 65 per share from $77/USD 64.
At this point, most of Scotiabank’s business lines are at or above prepandemic levels, with international being the primary remaining drag, and we expect this to improve over the next year.
Eric Compton, Morningstar Analyst
National Bank of Canada (NA)
Narrow-moat rated National Bank of Canada reported solid fiscal third-quarter results. Earnings per share were $2.36, representing solid year-over-year growth compared with EPS of $1.66 in the same period a year ago and higher than last quarter’s EPS of $2.25. Provisioning continues to be a major driver of improved earnings, coming in at a net benefit of $43 million this quarter, a multi-year low and materially lower than the $500 million charge the bank took in the second quarter of 2020. This aligns with our view that the Canadian banks will be fine from a credit perspective and that better results should be the norm going forward. We still expect the return of fee growth and much lower provisions to drive solid earnings growth for the rest of the year, while the lack of a boost from lower provisioning will make for tougher comps for the Canadian banks in 2022.
Pre-provision revenue continued to be solid for the bank as strong all-around loan growth helped drive an increase in net interest income and fees remained above a $1 billion quarterly run rate. Trading revenue has come back down to earth while investment banking-related revenue has also been coming down from recent highs. Some normalization here isn’t surprising. Wealth-related revenue was up 21% year over year, although on a sequential basis the growth was much slower, only 1%, with transaction-related fees down and fee-based revenue up. The specialty finance unit, unsurprisingly, saw double-digit revenue growth. Overall, we like the bank’s ability to outgrow peers on the balance sheet and on the top line, all while maintaining the best returns on equity in the industry. After factoring in higher top-line growth, we are increasing our fair value estimate to $98 per share from $93.
Eric Compton, Morningstar Analyst
Royal Bank of Canada aka RBC (RY)
Wide-moat-rated Royal Bank of Canada reported solid fiscal third-quarter earnings. Adjusted earnings per share were $3, solid year-over-year growth compared with $2.23 in the same period a year ago and higher than last quarter’s $2.79. Provisioning continues to be a major driver of improved earnings, coming in at a net benefit of $540 million this quarter, a multiyear low and materially lower than the $2.8 billion charge the bank took in the second quarter of 2020. This aligns with our view that the Canadian banks will be fine from a credit perspective and that better results should be the norm going forward. We still expect the return of fee growth and much lower provisions to drive solid earnings growth for the rest of the year, while the lack of a boost from lower provisioning should make for tougher comparisons for the Canadian banks in 2022.
Fee income remained particularly good for wealth-related operations and investment banking, while trading-related fees and brokerage fees fell back a bit. We also think we hit the bottom for net interest income last quarter, as it started to recover in the current quarter. With noninterest income remaining strong and persistent loan growth, we are increasing our fair value estimate for Royal Bank of Canada to $132 per share.
Eric Compton, Morningstar Analyst
The Toronto-Dominion Bank (TD)
Wide-moat-rated Toronto-Dominion reported adjusted EPS of $1.96 for the fiscal third quarter, solid year-over-year growth compared with $1.25 in the same period a year ago. Provisioning continues to be a major driver of improved year-over-year earnings, coming in at a net benefit of CAD37 million this quarter, materially lower than the $2.2 billion million charge the bank took in the third quarter of2020. This aligns with our view that the Canadian banks will be fine from a credit perspective and that better results should be the norm going forward. We still expect the return of fee growth and much lower provisions to drive solid earnings growth for the rest of the year. We believe the bank still has room to release more reserves. We think commercial and card growth could start to improve in 2022, while less of a boost from lower provisioning should make for tougher comparisons.
Toronto-Dominion arguably had less impressive earnings than peers in the quarter, with less growth in revenue, the balance sheet, and assets under management. The bank has one of the larger U.S. exposures and was therefore hurt more by movements in the exchange rate. Excluding foreign exchange, revenue would have been up closer to 4%, which would have been about in the middle of the pack. TD is also more exposed to the card business, where balances continue to lag as consumers have excess cash and aren’t borrowing on their cards. The bank also noted that it is introducing new deposit offerings in the U.S., which limit overdraft charges and could cost the bank roughly $40 million to $50 million in fees per year, or less than halfa percentage point of revenue and therefore immaterial. This is a move many U.S. banks have already taken, and we view it as necessary to keep up with the competition. As we incorporate these earnings into our projections, we don’t expect to materially change our fair value estimate of $85.
-Eric Compton, Morningstar Analyst
Canadian Imperial Bank of Commerce, aka CIBC (CM)
Narrow-moat-rated Canadian Imperial Bank of Commerce reported fiscal third-quarter adjusted EPS of $ 3.93, solid year-over-year growth compared with CAD 2.71 in the same period a year ago and higher than last quarter’s $3.59.Provisioning continues to be a major driver of improved earnings, coming in at a net benefit of $99 million this quarter, a multiyear low and materially lower than the CAD525 million charge the bank took in the third quarter of 2020.This aligns with our view that the Canadian banks will be fine from a credit perspective and that better results should be the norm going forward. We still expect the return of fee growth and much lower provisions to drive solid earnings growth for the rest of the year, while the lack of a boost from lower provisioning should make for tougher comparisons for the Canadian banks in 2022.
With noninterest income remaining strong, credit costs coming in lower than our previous expectations, and stronger loan growth, we are increasing our fair value estimate for Canadian Imperial Bank of Commerce to $153.
-Eric Compton, Morningstar Analyst
