The largest Canadian banks have proven over the past decade that they not only endure times of economic duress better than their American counterparts, but that they can grow at high rates coming out of a recession as well. The group as a whole also pays very nice dividends, making them attractive for income investors.
Valuations have come down of late, making stocks that were somewhat expensive last year more in line with fair value, and increasing their respective total return profiles as a result.
In this article, we’ll take a look at four large Canadian banks – The Royal Bank of Canada (RY), The Bank of Nova Scotia (BNS), Bank of Montreal (BMO) and Toronto-Dominion Bank (TD) – and rank them in order of highest prospective total returns.
The top four big banks in Canada are very shareholder-friendly, with attractive cash returns.
Read on to see which Canadian bank is ranked highest in our Sure Analysis Research Database.
Canadian Bank Stock #4: Bank of Montreal
Bank of Montreal was formed in 1817, becoming Canada’s first bank. The past two centuries have seen BMO grow into a global powerhouse of financial services and today, it has more than 1,500 branches. BMO stock has a market cap of $50B.
In addition to trading on the New York Stock Exchange, Bank of Montreal stock also trades on the Toronto Stock Exchange, as do the other stocks in this article. You can download a database of the companies within the TSX 60 below:
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BMO’s recent Q2 earnings were strong as adjusted earnings-per-share rose 15%. Broad strength across the company’s segments contributed to not only revenue growth, but operating leverage as well, with the latter metric rising 3.5% against the company’s target of 2%. Loan performance remains healthy and the company raised its dividend 7% while also repurchasing 5M shares of its own stock. Management’s commentary was upbeat for the rest of the year so BMO’s outlook certainly looks positive.
Source:Â Q2 Investor Presentation, page 16
This chart from the company’s Q2 investor presentation shows improvement in its provision for credit losses. This is a critical metric for banks that shows management’s expectations for how many of its loans will likely require impairment down the road. This positively impacts earnings as a lower PCL number means fewer loans will be impaired and thus, will not detract from future earnings. BMO’s PCL number was $251M in Q2 of last year but that number fell markedly to $160M in this year’s Q2.
BMO’s earnings performance was very stable in the past decade. BMO has produced higher earnings-per-share every year since 2009 and for this year, we are forecasting earnings-per-share of $8.15, and we expect 4% annual growth thereafter.
We see low single digit revenue growth as the primary driver of earnings-per-share growth moving forward, as well as a low-single-digit tailwind from share buybacks. Further margin expansion will be challenging to achieve, given they are already increased significantly. BMO will continue to perform well, but future growth from record highs will be difficult to achieve.
