Canadian Bank Earnings Week: CIBC Surprises and Expectations of Dividend Increases

This week of August 24-28, all the talk on Bay Street is about the Big 6 Canadian banks reporting fiscal Q3 (third quarter) earnings.  Earnings results of the Big 5 are important to many Canadian investors, who are almost all invested in one or more of these banks through their pension and broad-based mutual funds or their DRIPs.  But earnings also give an important indication to institutional investors as to what can be expected from the rest of the banks, and, importantly, how the Big 5 will be positioned for further growth and expansion ahead.

So far this week’s results have been mixed, but all mostly positive.  Here’s the reporting schedule:
Tues – Bank of Montreal (BMO)
Wed - CIBC (CM)
Thu – TD-Canada Trust (TD), Royal Bank (RY), National Bank (NA)
Fri – Scotiabank (BNS)

Lower-Than-Expected-Profits But CIBC Still Up 34% For the Year

Mark Bunting, analyst for BNN, reports that CIBC profits came in only slightly lower than the expected $1.39/share.  CIBC missed this by just three cents.  New profits are still up five-fold from last quarter and the stock is up 34% year to date – lower than its peers, but nothing to complain about.

CIBC might be taking a little longer than some of the banks to “catch up” following the hits from the credit crisis.  Canada’s own banking operations have been remarkably stable throughout financial years 2008-2009, garnering the reputation of being the most stable banks in the world.  But their U.S. market exposure has caused some volatility, especially for CIBC, BMO and TD.  During the credit crisis, Bunting reports, CIBC was the problem child due to subprime exposure in particular (they had $11-billion of write-downs in this area alone), but since then they’ve been working hard to cut their exposure to risky assets such as these and now they exercise much more discipline in this regard.

As one example, CIBC now has a tier-one capital ratio of 12%, among the highest of all North American banks.  Nevertheless, Bunting cites the analysis of John Aiken from Dundee Securities (on Twitter as @CdnBankTwit), who he believes hit the nail on head: CIBC’s attempts to reduce risk is bearing fruit, Aiken says, but don’t think they are out of the woods yet.

BNN also spoke with Colin Cieszynski, market analyst, CMC Markets Canada about this week’s lower-than-expected profits for CIBC.

According to Cieszynski, CIBC looks to be stabilizing; it has better results than last quarter. This quarter, CIBC posted a larger gain on their subprime mortgage exposure in the U.S.  So there may be some positive surprises there for the future upside.  Compared to other banks, they have same core businesses, but are just a bit rough around the edges: they’ve got some more capital markets activity in the U.S. which gives them more risk exposure.  For this reason, they might not be as representative of the group of Canada’s banks as some of the other Big 5.  Cieszynski also notes that the dividend yield is attractive now on CIBC and that the risk of dividend cuts has decreased on all Canadian banks.

Bank of Montreal (BMO) Beats Analyst Expectations With Record Revenue

Bunting reported yesterday that BMO came in with $1.05/share vs. the expected .95cents/share.  BMO has benefited from the equity rally like the others, but has actually outperformed its peers this year, up 57% year to date.

Unsurprisingly, BMO’s CEO sees positive signs in the economic environment, indicating that we’re moving from a challenging environment to more normal conditions.  The bank is seeing momentum in personal and commercial banking, with the commercial side especially strong; market share here increased over 20%.  As for loan-loss provisions, they’re setting aside more than expected, but still less than last year.  The dividend will be held at 70 cents per share, qualming worries that they might be cut following Manulife’s surprise a month ago.  BMO was also the bank seen as most likely to be a candidate for a dividend cut among the Big 5.

Bank Expansion plans and U.S. Exposure

The banks that have had more U.S. markets exposure throughout the recession have been hit hard, but as U.S. markets gradually improve, these banks could see much more upside than their peers as a result.  BMO and TD obviously have the most retail exposure in the U.S., but Royal Bank has also been growing south of the border recently, too.

As for international expansions, there has been talk of one of the Big 5 acquiring a stake in Allied Irish Banks (AIB), one of Ireland’s top banks.  This would help CIBC, since it hasn’t been as big in Europe as the other banks; and the Canadian insurance companies have already been there for some time.  CIBC recently has, however, expanded into the Caribbean.  Meanwhile, Scotiabank has been there for years and has also expanded significantly into Chinese markets.

Canadian Bank Customer Satisfaction Ranking Finds Canadians Still Relatively Happy About The Big 5, But TD Especially

BNN interviewed Ludo Li, Senior Director at J.D Power & Associates, about the ranking of Canada’s banks and consumer retail banking satisfaction over the past four years.  Li’s report finds satisfaction has remained about the same; and notes that this is significantly different than consumer sentiment about banks in the U.S.

Li measured six factors from satisfaction with bank statement transactions to convenience, fees and problem resolution.  Li found that TD ranks #1 again in five of the factors, and ranks #1 overall. #2 is Royal, then #3 BMO, with CIBC ranking last.  But this past year one complaint kept popping up more than others and more than in previous years: anecdotal fees.  It seems as though Canadians are getting more vocal about being charged more fees than peers throughout the financial industry worldwide.  It is well known, for example, that Canadians pay more in MERs than other countries.  Commissions on stock trades are also unbearably high even at the mainstream online “discount” brokers.

When Will The Banks Increase Their Dividends Again?

BMO is holding their dividend at 70 cents for now, and CIBC is holding theirs at 87 cents.  No dividend cuts are expected at TD, Royal or Scotiabank.  If anything, analysts say, there are increases on the horizon, although not in this quarter or this year.  Some analysts are expecting bank stocks to come off 20-30% over the next couple of months, however – so you might want to wait for that September or October pullback before adding to your positions.

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Tagged as: Bank of Montreal, Bank of Nova Scotia, BMO, BNS, Canadian banks, CIBC, CM, earnings, earnings reports, National Bank, Royal Bank, RY, TD, TD-Canada Trust