Ruth Saldanha: After all six Canadian banks announced results and dividends and buybacks, what can we expect going ahead? Is this the new dividend bonanza for Canadian bank investors? Morningstar equity analyst, Eric Compton, is here today to tell us.
Eric, thank you so much for being here today.
Eric Compton: Thank you for having me.
Saldanha: First up, how are you reading the latest Canadian bank results?
Compton: Yes. So, Canadian bank results were exceptionally good in our view. Admittedly, they actually came in better than we were expecting, so beat our estimates, generally beat the street estimates as well. So, we weren't the only ones. But really strong results driven by – loan growth is holding up really well. Even with certain debt levels trending higher, but loan growth is still holding up really well. Fees are holding up generally stronger than I expected. I thought there would be maybe a little more normalization, particularly at capital markets fees and while we've seen some of that, it has not been to the degree that I expected. And another key factor has been assets under management have grown quite a bit as have wealth management-related fees, and the banks are really just dominating on that front. So, all of those items really drove strong results in fiscal 2021.
And another thing that I think was really a positive coming out of Q4 earnings was that we were generally expecting earnings and potentially revenue growth to stagnate a bit heading into 2022, particularly after an exceptionally strong 2021. But essentially, all of the banks are guiding for a mid-single-digit pre-provision, pre-tax earnings growth, which generally was also I thought on the strong end of things, considering how good 2021 was. So, overall earnings were really strong. I think that outlook is strong as well. And a couple of things that I think drove the improved outlook even for 2022 were the rate catalyst for the banks has been moved forward in Canada even over the last couple months, loan growth holding up well and fees, especially wealth-related fees, I think, doing really well. So, those are the key takeaways from earnings overall. Really strong, beat our expectations, and we had to adjust and raise a lot of our fair values as a result.
Saldanha: Well, one thing that income investors were really excited about was the dividend announcements, and all the six banks delivered with the largest payout being about 25%. Do you think this is the start of a trend? What can investors expect for Canadian bank dividends in 2022?
Compton: Yes. So, we were generally expecting a higher payout. So, normally, the average dividend growth for a Canadian bank year-over-year is, call it, 6% plus or minus a couple of percentage points. And given that dividend increases were on hold during the pandemic, we generally were expecting a higher growth rate just to make up for the last year's lack of growth. That said, we were generally expecting some more along that 10%, 11%, 12% range. And while some of the banks were around that, as you mentioned, some of the banks were quite a bit of ways above that as well. Particularly, Bank of Montreal was the one with the 25% increase, so that was really impressive. And actually, National Bank of Canada, the smallest Canadian bank we cover, was actually right around that range as well. So, that was impressive, generally came in ahead of where we were expecting the high end to be. Part of that was driven by just the higher earnings growth than we were expecting. So, really strong, I think, result on the dividend side.
However, given that that was kind of the catch-up to make up for a lack of growth last year, I would expect growth to normalize back to that 6% plus or minus 1 or 2 percentage points going forward. So, it's nice – earnings have held up. They made up for the lack of growth last year. There really hasn't been a hit to dividend growth as a result of the pandemic because of that catch-up. But I would expect more normal growth going forward.
Saldanha: You've raised your fair value estimates for many of the banks. So, what's your top Canadian bank pick right now and why?
Compton: Yes. So, heading into – kind of when we talked last quarter, our top pick back then was Scotiabank driven by – we didn't think the market was giving them a lot of credit. We felt multiple (as undemanding). And we felt there was kind of a comeback story as far as better earnings growth from particularly their international operations. And Scotiabank did decently this quarter. Their stock has generally performed in the top half. However, Toronto-Dominion was the real standout. And so, Scotiabank was good. Toronto-Dominion was even better. However, after this quarter earnings, after our latest adjustments, we think Toronto-Dominion, Scotiabank and Bank of Montreal all are roughly fairly valued at this point, and we actually favour the names that have had less momentum more recently. And so, I think on a group basis, we would expect Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada, those three to do better than the other three.
However, if I had to pick just one out of the three, I just mentioned, I would go with National Bank of Canada over Royal Bank of Canada and the Canadian Imperial Bank of Commerce. And the reason for that is, they've got, I think, one of the better franchises. They don't always get a ton of notoriety or credit because they are one of the smaller banks, more just in Quebec, so less notoriety just because of the size. However, they churn out returns on equities better than all their peers, and I think they've got a growth story going forward where they've got access to better balance sheet growth with their ABA Bank and also Credigy segments. They also – their wealth management segment has been growing really well, generally taking share from the market, and I think they can keep that up. So, I think a strong revenue growth story heading into 2022. It can maybe unlock even a little more value there. Potentially you might even see, I think, a dividend hike maybe midyear for them as well, because they generally have more room to hike their dividend, we think, than peers. So, of those three, I think National Bank of Canada is my favourite. So, that would be my top pick.
Saldanha: Thank you so much for joining us today with your perspectives, Eric.
Compton: Absolutely. Thank you, Ruth, for having me.
Saldanha: For Morningstar, I'm Ruth Saldanha.
