Canada’s Big Banks Survive Their Beatdown

In the latest issue of Canadian Edge, we wrote about how the stocks of Canada’s Big Six banks had been selling off due to concerns about their exposure to the turmoil in the country’s oil and gas sector.

Since hitting an all-time high in mid-September, the Standard & Poor’s/Toronto Stock Exchange Commercial Bank Index has suffered a jagged performance. In fact, as my colleague David Dittman reported, Canadian banks had their worst start to the year in 25 years, dropping nearly 10% on a price basis in local currency terms and down 14.6% from the aforementioned high.

The banks then staged a moderate rebound through mid-February before plunging anew as five of the Big Six prepared to report earnings this week for the fiscal first quarter of 2015 (ended Jan. 31).

The Financial Post observed that investor sentiment was souring over worries not just about how the energy sector’s woes might weigh on earnings, but also concerns about slowing loan growth due to a weak economy and tightening net interest margins following further central bank easing.

As a result, the paper reported that short interest had spiked during the two-week period prior to the banks’ scheduled earnings releases, with Canada’s three largest banks, Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia, ranking among the 20 most shorted stocks in Canada based on data from the Toronto Stock Exchange.

But Canada’s biggest banks managed to defy expectations for the most part, and their stocks began climbing again.

Indeed, four of the five that reported this week delivered upside earnings surprises, beating estimates by an average of 3%. And a slightly different subset of four beat revenue expectations by an average of 4.7%.

The big winner by far was Royal Bank of Canada (TSX: RY, NYSE: RY), the country’s largest bank by market capitalization. We had recently upgraded the bank to a “buy” from a “hold” on the strength of its deal to buy Los Angeles-based City National Corp for $5.4 billion, the largest U.S. bank acquisition in more than three years.

RBC’s adjusted earnings per share surpassed the consensus forecast by 6%, its biggest beat since the third quarter of 2013. Even more impressive, the bank trounced revenue estimates by 14.3%, for its biggest top-line beat in five years.

The bank’s profits surged 17% year over year during its fiscal first quarter, to a record CAD2.46 billion. Management attributed this performance to record earnings from its Personal & Commercial Banking segment (profits up 17% year over year) and strength in its Capital Markets division (profits up 18% year over year) due to an increase in client trading and rising mergers and acquisitions (M&A) activity.

A plurality of analysts remain bullish on RBC, with 10 “buys,” nine “holds,” and two “sells.” Analysts forecast full-year fiscal 2015 earnings per share will rise 6%, to CAD6.56, on a 3% increase in revenue, to CAD35 billion.

RBC also took the opportunity to raise its quarterly dividend by 2.7%, to CAD0.77 per share (CAD3.08 annualized), for a forward yield of 3.9%. The bank has grown its dividend by 11.3% annually over the past three years.

But RBC wasn’t the only big bank to boost its dividend. In fact, three of the five banks that reported this week upped their payouts.

In addition to RBC, Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) announced a 2.9% increase to its quarterly dividend, to CAD1.06 per share (CAD4.24 annualized), for a forward yield of 4.4%. CIBC, which is the country’s fifth-largest bank by market cap, has grown its dividend by 4.2% annually over the past three years.

And despite only narrowly beating earnings forecasts, Toronto-Dominion Bank (TSX: TD, NYSE: TD) was the biggest booster of all, raising its quarterly dividend by a whopping 8.5%, to CAD0.51 per share (CAD2.04 per share annualized), for a forward yield of 3.8%. The bank has grown its dividend 12% annually over the past three years.

TD, which is Canada’s second-largest bank by market cap (just shy of RBC), actually operates a bigger branch network in the U.S. than in Canada. Perhaps as a result of its sizable exposure to the U.S. market, the bank also boasts the most bullish sentiment among its Big Six peers, with 13 “buys,” seven “holds,” and one “sell.”

Bank of Nova Scotia (TSX: BNS, NYSE: BNS), which is our favorite Canadian bank owing to its significant international exposure, is scheduled to report earnings for the fiscal first quarter of 2015 next week, on March 3. Analysts are forecasting a 3% increase in adjusted earnings per share, to CAD1.38, on a 4% rise in revenue, to CAD5.95 billion.

On the strength of these earnings results, the S&P/TSX Commercial Bank Index is up 4.4% from this week’s low, and the index is also trading 9.3% above its trailing-year low in late January.