Thursday, May 25, 2006

Cdn Banks: Global Leaders in Total Returns Over 5 Years

  
The Globe and Mail, Sinclair Stewart, 25 May 2006

Canadian banks may complain about losing relevance on the world stage, but it's hard to see how this has hurt their investors. The banking industry here has posted a total return of 15.5 per cent annually over the past five years, the best performance of any country in the world, according to a study by the Boston Consulting Group.

The study, to be released today, says that Canada's Big Six banks have found ways to create shareholder value by looking inward, rather than outward, and fine-tuning their operations in what is a very mature market. Despite suffering through tighter margins in their retail business, the result of both fierce competition and a low interest rate environment, four of the largest Canadian banks reported record profit last year.

They managed this in large part by streamlining their management structures, cutting costs, dramatically reducing their risk profiles, and focusing on new products with higher profit margins, according to the study. They were also helped by a robust economy that has witnessed a stock market rebound and a boom in house purchases.

The findings appear to challenge conventional wisdom that Canadian banks need scale to be competitive. The current restriction on mergers may have limited their ability to keep pace in terms of scale with larger peers to the south, but has done little to curb profitability.

"Even though Canadian banks have historically had lower multiples than banks in the United States, the Canadian institutions have not only managed to catch up, but today enjoy higher valuations, on average, than their peers south of the border," the study noted.

Indeed, U.S. banks ranked a distant fifth in the total return rankings, at 5.8 per cent, a figure that includes both stock appreciation and dividend payouts between 2001 and 2005. Australia finished second, at 14.3, and France was third, at 13.8. Britain was in eighth spot, at 4.7 per cent.

Three of Canada's Big Six banks, meanwhile, were ranked among the world's top 10 stock-market performers in this period, based on risk-adjusted total returns to investors. Bank of Nova Scotia was third, at 11 per cent, Royal Bank of Canada, spurred by its stock market revival, was fifth at 8.3 per cent, and Bank of Montreal was eighth, at 6.4 per cent.

Canadian Imperial Bank of Commerce finished 10th in a separate mid-capitalization category, at 5.9 per cent.

For 2005, alone, Canadian banks collectively finished seventh, with a total return of 25 per cent. On a return-on-equity basis -- a key yardstick of banking profitability -- the domestic industry was ranked fifth, at 15.7 per cent.

Big Six ahead of the pack

Canada's banking industry has posted the best performance of any country in the world over the past five years, according to a Boston Consulting study

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Total annual shareholder return^ (2001-2005)

• Canada 15.5
• Australia 14.3
• France 13.8
• Japan 9.1
• U.S. 5.8
• Switzerland 5.6
• Spain 4.8
• Britain 4.7
• Italy 2.6
• Germany 0.9

^ Total shareholder return comprises capital gains and dividend yields. All TSRs were calculated in local currencies

* * *

Top 10 large-cap performers (2001-2005)

• Bank of America 14.2
• Sberbank 11.5
• Bank of Nova Scotia 11.0
• Wachovia 10.0
• Royal Bank of Canada 8.3
• Lehman Brothers 7.4
• Société Générale 6.7
• Bank of Montreal 6.4
• HBOS 6.3
• BNP Paribas 6.2

Note: the sample comprises the 50 largest banking companies by market capitalization as of the end of 2005. Risk-adjusted relative total shareholder return.

Sources: Thomson Datastream & BCG Analysis
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The Globe and Mail, Allan Robinson, 25 May 2006

The heavyweight Canadian banking sector continues to roll out its second-quarter results today after several weeks of declining share prices, and the latest results could bolster the group at a time when cyclical sectors of the stock market are getting crushed, strategists say.

On tap for today is Toronto-Dominion Bank. The bank is a "unique growth situation among Canadian banks" because of its U.S. exposure, said Michael Goldberg, an analyst with Desjardins Securities.

Much of the growth is expected to be generated by both its U.S. banking arm, TD Banknorth, and its 38-per-cent-owned wealth management business, TD Ameritrade Holding Corp., he said.

Analysts forecast TD Bank earned $1.13 a share during the second quarter, compared with $1 a year earlier, according to Thomson First Call. They forecast profit for fiscal 2006 at $4.65 a share, compared with $4.14 a year earlier. The shares closed yesterday at $61.83 on the Toronto Stock Exchange.

"One of the areas where [shares] are a good deal is the financial sector," said Jim Hall, director of research for Calgary-based Mawer Investment Management and portfolio manager for its Canadian equity fund. "The banks are a good place to be." Reporting season for the Canadian banks got under way yesterday with Bank of Montreal reporting second-quarter profit growth of 7 per cent and it increased its dividend by 17 per cent.

"BMO's dividend [increase] suggests that at least one big bank isn't overly worried about the future earnings picture," said Myles Zyblock, chief institutional strategist at RBC Dominion Securities Inc. "Domestically generated rate pressure on the banks should ease," now the Bank of Canada's has decided to stop raising rates, he said. "It is probably a good time to add positions in TSX banks in Canadian-dedicated equity portfolios."

The decline in the Canadian banking sector during the past few weeks as a result of interest rate fears and slower earnings growth has restored valuations to a more normal level at a time when the energy and diversified metal sectors look expensive on a historical basis, Mr. Zyblock said.

Among the risks facing TD Bank is its susceptibility to weakness in the U.S. dollar, according to RBC, which has an "outperform" rating on the bank and a 12-month share price target of $72. Desjardins Securities has a 12-month target of $73.50.

Although there is a potential for strong earnings gains from TD Ameritrade, under the terms of the deal in which the bank's U.S. brokerage operations were merged with Ameritrade, a discount broker, TD Bank's ownership is capped at 39.9 per cent until January, 2009, unless it bids for the entire company, said Genuity Capital Markets. TD Ameritrade is expected to account for about 6 per cent of TD's second-quarter earnings.

TD Bank began to report the results of TD Ameritrade on a consolidated basis beginning Jan. 25.

National Bank of Canada is also scheduled to report second-quarter results today and Royal Bank of Canada tomorrow.

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