BMO Q1 2012 Earnings

Scotia Capital, 29 February 2012

• BMO cash operating EPS increased 8% YOY to $1.42, above our expectations of $1.40 and IBES at $1.37 due to loan loss recoveries related to the M&I acquisition, partially offset by stock based compensation and lower insurance earnings due to impact of decline in long term interest rates. Wholesale earnings had a partial rebound with retail earnings softening.

Implications

• P&C Canada earnings declined 6% YOY or 3% on a comparative basis, excluding a security gain. Weak retail earnings were due to declines in NIM and lower volume growth. BMO Capital Markets earnings increased 38% sequentially to $198 million driven by a 73% rebound in trading revenue to $284 million. P&C U.S. earnings declined 11% sequentially due to the negative impact of lower net interest income, lower interchange fees and higher expected loss provisions.

• Operating ROE: 15.0%, RRWA: 1.73%, CET1: 7.2%

Recommendation

• We are trimming our 2012E EPS to $5.75 from $5.80, with 2013E EPS unchanged at $6.30. Maintain 3-Sector Underperform based on low relative profitability and weak core earnings.

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Preview of Banks' Q1 2012 Earnings

Scotia Capital, 22 February 2012

Banks Begin Reporting February 28

• Banks begin reporting first quarter earnings with Bank of Montreal (BMO) on February 28, followed by Toronto-Dominion Bank (TD), Royal Bank (RY), and National Bank (NA) on March 1, Bank of Nova Scotia (BNS) on March 6, Canadian Western Bank (CWB) and Laurentian Bank (LB) on March 7, and Canadian Imperial Bank of Commerce (CM) closing out reporting on March 8.

• Scotiabank GBM’s earnings estimates are highlighted in Exhibit 2, consensus earnings estimates in Exhibit 3, and conference call information in Exhibit 4.

IFRS Adoption

• Canadian banks have converted to International Financial Reporting Standards (IFRS) starting fiscal 2012 (effective November 1, 2011), with the first quarter marking the first earnings reported under IFRS. In preparation for the transition, the banks have provided their 2011 financial position and results of operations under IFRS.

• The overall financial impact on 2011 financial statements is modest. In summary, total assets increased on average 6%, with loan balances increasing on average 19%, and common equity declining 9%. Cash operating EPS impact ranged from -4% to +3%. Return on equity increased 2.0%, to 19.5%.

First Quarter Earnings - 3% YOY Decline, Up 8% Sequentially

• The sovereign debt crisis in Europe continued to heighten systemic risk in the first half of the quarter, leading to capital markets strain and negatively impacting economic growth globally, with Canada not immune. The intensity of the crisis, while still elevated, showed signs of easing in the latter half of the quarter as demonstrated by improving LIBOR-OIS spreads and lower sovereign/global banks CDS spreads.

• We expect a sequential improvement in wholesale earnings off the lows, with wealth management to be stable and retail banking earnings resilient, although growth is slowing. Retail banking earnings are dependent on net interest margin performance/pressure as volume growth slows. Our first quarter earnings estimates are 2% above consensus.

• We expect return on equity (IFRS) to increase to 17.9% versus 17.3% in the previous quarter (16.3% under Canadian GAAP). The improvement in ROE is aided by the transition to IFRS and the resulting reduction in common equity (retained earnings). Return on risk-weighted assets (RRWA) remains extremely high at 2.35% versus 2.21% in the previous quarter.

• The two main earnings variables to focus on this quarter, in our view, are trading revenue and the retail net interest margin.

• Trading revenue will likely remain weak, but is expected to improve quarter over quarter. We expect trading revenue to be $1.4 billion, a 33% increase sequentially but 42% lower year over year (YOY). The sequential trading improvement is expected from fixed income, with 10-year Canadian and U.S. government bond yields declining 39 bps and 32 bps, respectively. Also, fixed income underwriting activity increased both domestically and globally. Government bond and corporate bond underwritings increased sequentially by 11% and 127%, respectively, which is expected to translate into higher trading volumes. TSX average trading volumes (equity) were relatively soft, declining 11% quarter over quarter (QOQ), although the S&P/TSX Composite Index increased 2% in the quarter. M&A activity was solid, increasing 19% sequentially. Overall, we expect bank group underwriting and advisory revenue to rebound by 42% sequentially to $965 million from the very low fourth quarter level.

• The other focus variable is the retail net interest margin. We continue to forecast a decline of 2 basis points per quarter out to the end of 2013. Rational pricing is required to mitigate some of the margin pressure.

• Credit trends remain stable with loan loss provisions expected to decline modestly to $1.5 billion or 0.37% of loans.

Dividend Increases Expected in 2012 - Timing Discretionary

• The bank group’s dividend payout ratio is currently 43% of our 2012 earnings estimates versus the bank group target payout ratio range of 40% to 50%, so just slightly below the midpoint of the range. In our view, the strongest candidates for dividend increases in fiscal 2012 based on target payout ranges (see Exhibit 5) are LB, NA, CWB, and TD, followed by BMO, BNS, CM, and RY. We expect dividend growth in 2012 to mirror earnings growth in the 6%-7% range.

• For the quarter, the banks may elect to modestly increase dividends in the 3%-4% range, but may elect to keep dividends unchanged for a 6%-8% increase later in 2012. Timing is extremely discretionary.

Bank Share Performance & Valuations

• Canadian bank share prices substantially outperformed the TSX in 2011 despite systemic risk rising sharply as the European sovereign debt crisis escalated. As systemic risk abates and normalcy returns to the capital markets, we believe bank stocks will be well positioned for another period of strong outperformance.

• The Canadian bank index outperformed the market by 10% in 2011 and is performing in line with the market, up 4% year-to-date as at February 17, 2012. The bank beta trade has been on thus far in 2012, with Bank of America, Citigroup, and JP Morgan up 44%, 25%, and 16%, respectively, versus 4% for Canadian banks.

• The market continues to chase high dividend yielding sectors, creating valuation premiums in Pipes & Utilities and REITs, but not banks because of systemic risk. The negative impact of systemic risk on valuations is evident when you compare bank dividend yields versus Pipes & Utilities (see Exhibit 11) and REITs (see Exhibit 12), where systemic risk is relatively low. Bank dividend yields are now 1.0 standard deviations above the mean versus Pipes & Utilities and 2.4 against REITs.

Maintain Overweight Recommendation

• Our share price targets remain unchanged. Our share price targets are based on 12.6x our 2012 earnings estimates and we believe are extremely conservative in the context of the interest rate environment, dividend levels, and capital generation rates.

• In fact, if Pipes & Utilities can trade at 20x to 22x earnings, we believe a banks stock can trade at 16x to 17x in a period of low systemic risk and perhaps a period where the market recognizes the decline in the risk premiums post the full implementation of Basel III and the global restructuring of the banking industry.

• We maintain 1-Sector Outperform ratings on TD, CM, and RY, 2-Sector Perform ratings on CWB, BNS, and LB, and 3-Sector Underperform ratings on BMO and NA.

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BMO Q4 2011 Earnings

The Financial Times, 6 December 2011

Canada’s five biggest banks have reaped the benefits of a vast, stable retail network by reporting sizeable advances in – and, in some cases, record – earnings in their latest fiscal year.

Bank of Montreal, the last of the five to publish results, reported net income on Tuesday of C$3.27bn ($3.23bn) for the year to October 31, up 16 per cent from 2010.

In a remark that would apply to few of BMO’s US or European rivals, Bill Downe, chief executive, described 2011 as “a terrific year”, including record earnings from personal and commercial banking.

The Canadian banks have a low direct exposure to the eurozone. Europe makes up 6 per cent of total lending assets at Royal Bank of Canada, the most exposed. RBC officials note that much of its lending is to blue-chip European companies.

Even so, Mr Downe told the Financial Times that the eurozone crisis “has implications for overall economic growth, and in that sense it’s important”. The banks – like the Canadian economy – are also heavily dependent on the health of US financial markets.

Several sounded a cautious note for the future. Ed Clark, Toronto-Dominion’s chief executive, cited low interest rates, sluggish economic growth and an uncertain regulatory environment.

All five banks – RBC, TD, Bank of Nova Scotia, BMO and Canadian Imperial Bank of Commerce – reported double-digit increases in fourth-quarter earnings. Returns on equity ranged from 14.3 per cent at TD and BMO to CIBC’s 20.6 per cent.

TD and Scotiabank reported record annual earnings of C$5.89bn and C$5.27bn respectively. Peter Routledge, analyst at National Bank Financial, expects TD to announce its third dividend increase in a year next quarter. The bank is one of a handful worldwide that still carries a Moody’s triple A credit rating.

“We’ve benefited from a very strong economy and good employment growth at home”, Mr Downe said. “We’re headquartered in a very stable country.”

He added that “the fact that we’re well-capitalised and have a strong balance sheet has drawn deposits to the bank”. BMO’s Chicago-based subsidiary, BMO Harris Bank, boosted its deposit market share to 11.6 per cent from 9.5 per cent, overtaking Bank of America as the region’s second-biggest deposit-taker.

RBC has sought to woo European wealth-management customers with an advert that features a leafy maple tree against a desolate, wintry backdrop. The caption reads: “Standing tall for our clients in an uncertain world.”

George Lewis, head of RBC’s wealth management division, said that “given the current environment, we chose to initially focus our campaign in Europe, where we believe the stability of RBC represents great appeal for clients”.

One analyst expressed concern about rising non-interest expenses as a common thread among the results. Fourth-quarter expenses at Scotiabank, normally among the most parsimonious, jumped by 15.4 per cent.

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RBC Q4 2011 Earnings

Scotia Capital, 5 December 2011

• RY cash operating EPS increased 17% YOY to $1.09 per share, above our expectations of $1.06 per share and IBES consensus at $0.98 per share. Earnings were driven by record Canadian Banking earnings.

• Operating ROE: 17.1%, RRWA: 2.35%, CET1: 7.7%(E).

Implications

• Canadian Banking earnings increased 18% YOY and 6% QOQ as the Retail NIM only declined 2 bps YOY and 1 bps sequentially with loan growth solid at 7%. RBC Capital Markets (RBCCM) earnings were resilient in a difficult market, unchanged from the previous quarter with trading revenue increasing slightly. FX and equity trading improved with interest rate and credit trading flat. RBCCM was likely the positive surprise against very bearish IBES estimates.

Recommendation

• We are increasing our 2012E and 2013E EPS by $0.10 each to $4.80 and $5.20 based on the resilient retail NIM and IFRS. We are increasing our one-year share price target to $63 from $57. Reiterate 1-SO based on above industry group profitability and capital, and substantial earnings leverage to some type of normalization in capital markets.

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Scotiabank Q4 2011 Earnings

TD Securities, 5 December 2011

Last Friday before the open, the bank reported Core Cash (f.d.) EPS of $1.08 versus TD Securities at $1.09 and consensus of $1.08.

Impact

Slightly positive. With some helpers, Scotia delivered a basically in line result. The results were fairly balanced across the segments; importantly, we note continued progress in the International segment consistent with our expectations for above-average medium-term growth. We trimmed our estimates nominally, around lower near-term NIMs, but strong volumes, acquisitions and what we expect to be some increased expense discipline should help deliver reasonably good bottom-line growth in 2012. Overall, we continue to view Scotiabank as one of the best fundamental stories in the group. At current levels, we believe valuations are reasonably attractive and we reiterate our Buy rating.

Details

Sounds like some increased focus on harvesting recent growth/investment in 2012. We have agreed with Scotia’s decision to continue to press strategic investments/capital deployment over the past 24 months with an eye to building out the platform for medium-term growth. Efforts should continue in 2012, but management is suggesting a slight shift to harvesting returns over the coming year with some diminution in project spending and build-out which should manifest itself in better operating leverage and some better bottom-line earnings.

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TD Bank Q4 2011 Earnings

Scotia Capital, 2 December 2011

• TD operating EPS increased 28% YOY to $1.77 from $1.38 a year earlier, beating expectations due to strong results across all segments and high security gains.

• Operating ROE: 14.9%, RRWA: 2.95%, CET1: 6.2%E (incl. IFRS).

• Fiscal 2011 operating EPS increased 18% to $6.82 from $5.77 in 2010.

Implications

• Canadian P&C (TDCT) had strong earnings up 17% YOY to $905M, with U.S. P&C up 16% YOY to $328M. Wealth Management earnings were also strong increasing 28% YOY. Wholesale Banking earnings rebounded to $288M ($151 million before security gains) from $108M in Q3/11. Trading revenue was $286M versus a dreadful $109M in Q3/11. Trading revenue in the quarter was driven by very strong FX and equities with interest rate and credit recovering modestly.

Recommendation

• Our 2012E and 2013E EPS are unchanged at $7.10 and $7.80, respectively. Our 1-year price target remains $93. Maintain 1-SO based on an industry high capital generation rate (RRWA), low balance sheet risk, competitive positioning and no P/E premium to the bank group.

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CIBC Q4 2011 Earnings

Scotia Capital, 2 December 2011

• CM reported operating EPS of $1.87 (excl. a $0.12 merchant banking gain and other charges of $0.08). Earnings were strong, in line with our expectations of $1.90, however, handily above consensus EPS of $1.81.

• Operating ROE: 20.4%, RRWA: 2.71%, CET1: 8.1%

Implications

• Earnings were driven by strong results from Retail & Business Banking and Wealth Management up 15% and 20% y/y, respectively. Wholesale Banking earnings were resilient at $156M versus $160M in the previous quarter and a very weak $67M a year earlier. Trading revenue was solid at $165M versus $146M in Q3/11 and $157M a year earlier.

• CM has positive earnings momentum in 2012 from expected 1.8% reduction in statutory tax rate, $0.15 earnings accretion from American Century and $0.09 per share run rate accretion from preferred share redemptions and $0.20 accounting pickup from IFRS.

Recommendation

• We are increasing our 2012E and 2013E EPS both by $0.20 to $8.10 and $8.80, respectively due to IFRS and expected stronger operating results. We reiterate 1-SO due to CM's high relative profitability, low relative valuation and low risk balance sheet and business mix.

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