BMO Capital Markets, 1 October 2010
Scotiabank has been upgraded to Outperform, while Royal Bank’s rating slipped to Market Perform. Greater clarity on new bank capital rules has mitigated our concern they would hinder BNS’s international growth strategy. Moreover, we believe that the bank’s international operations provide a clear growth path, relative to its peer group, after credit costs have ``normalized. While the bank does trade at a premium valuation, this valuation not only reflects greater clarity in growth prospects, but also the bank’s much better-than-expected credit performance during the last cycle and better-than-average dividend growth potential. John Reucassel is forecasting an increase in earnings per share to $3.98 in fiscal 2010 and $4.40 in fiscal 2011.
We originally upgraded RY based on its leading franchise position in domestic banking, domestic wealth management, domestic investment banking, acquisition opportunities, growing global wholesale banking opportunities and strong capital position. However, we under-estimated the volatility in trading and have over-estimated the speed of the earnings recovery in wealth management, insurance and the international businesses. Since April, the shares have been the worst-performing shares in the sector by a wide margin. While we continue to believe that the bank’s franchises will ultimately reward Royal shareholders, the current valuation may provide better relative returns elsewhere.
Scotiabank has been upgraded to Outperform, while Royal Bank’s rating slipped to Market Perform. Greater clarity on new bank capital rules has mitigated our concern they would hinder BNS’s international growth strategy. Moreover, we believe that the bank’s international operations provide a clear growth path, relative to its peer group, after credit costs have ``normalized. While the bank does trade at a premium valuation, this valuation not only reflects greater clarity in growth prospects, but also the bank’s much better-than-expected credit performance during the last cycle and better-than-average dividend growth potential. John Reucassel is forecasting an increase in earnings per share to $3.98 in fiscal 2010 and $4.40 in fiscal 2011.
We originally upgraded RY based on its leading franchise position in domestic banking, domestic wealth management, domestic investment banking, acquisition opportunities, growing global wholesale banking opportunities and strong capital position. However, we under-estimated the volatility in trading and have over-estimated the speed of the earnings recovery in wealth management, insurance and the international businesses. Since April, the shares have been the worst-performing shares in the sector by a wide margin. While we continue to believe that the bank’s franchises will ultimately reward Royal shareholders, the current valuation may provide better relative returns elsewhere.
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Scotia Capital, 1 October 2010
Summary CIBC Investor Forum - Retail Markets
• CIBC held an Investor Forum yesterday afternoon focusing on the bank's Retail Markets division. The bank highlighted its improving core revenue trends and net income growth, citing revenue growth 2010 YTD of 9% with net income growth of 16%. This is a significant improvement from underperformances in fiscal 2008 and 2009. Net income growth was driven by positive operating leverage of 2% and lower loan losses. Credit trends continue to be positive with both credit card and personal loan losses declining.
• Revenue growth was relatively balanced from all segments with Personal Banking and Wealth Management each up 9% with Business Banking revenue up 6%.
• The bank also recapped its recent investments for growth including the purchase of Citigroup's Canadian MasterCard business and CIT asset based lending business, as well as significant branch expansion and investment in its mobile banking application and brand.
• In terms of market position, CIBC highlighted it was #1 in cards, #2 in mortgages, retail brokerage (revenue & assets) and ABMs, #3 in branch network, personal deposits/GIC (up from #4), business deposits and mutual funds. The improvement in market positioning in personal deposits/GICs is due partly to branch expansion & relocation. CIBC lagged in business lending at #4 and personal lending at #5. The gap in share on personal lending is $8 billion.
• CIBC provided a three-year target for the retail bank at $3 billion versus its $2.16 billion YTD Q3/10 annualized, representing an 11.6% CAGR.
• In terms of investing in its branch network, CIBC has expanded evening and Saturday hours at 400 branches and is building, relocating and expanding 70 branches by 2011.
• The bank acquired $2 billion in MasterCard outstanding balances and 570,000 active accounts from Citigroup. The acquisition increased CIBC's credit card balances outstanding to $15.8 billion and market share to 18.7% from 16.6%. The Citigroup MasterCard purchase is immediately accretive to earnings. The bank is not taking on credit card delinquent accounts.
• Mortgage & personal lending growth have been driven by mortgages at 7% with personal lending lagging at 2% partially due to a conservative lending approach. The bank loan growth outlook varied by product with mortgages at 4%, personal loans 5%, credit cards 2%-4% and business lending 5%-8%.
• In Wealth Management, CIBC cited it was #3 among the banks and #5 in the industry and leading in managed solutions (wrap products). Mutual fund sales performance has improved with 2010 long-term sales the highest since 2004.
• The presentation in general provided guidance on the bank's overall strategies in each of its three segments, Personal Lending, Business Banking, and Wealth Management.
• Personal and business lending are two products where the bank is underrepresented, providing opportunity for market to above-market growth.
• The presentations were positive although financial information was light. We expect improved performance from CIBC Retail Markets going forward. However, major Canadian banks are focused on retail banking and with slowing volume growth, competition is expected to remain stiff.
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Summary CIBC Investor Forum - Retail Markets
• CIBC held an Investor Forum yesterday afternoon focusing on the bank's Retail Markets division. The bank highlighted its improving core revenue trends and net income growth, citing revenue growth 2010 YTD of 9% with net income growth of 16%. This is a significant improvement from underperformances in fiscal 2008 and 2009. Net income growth was driven by positive operating leverage of 2% and lower loan losses. Credit trends continue to be positive with both credit card and personal loan losses declining.
• Revenue growth was relatively balanced from all segments with Personal Banking and Wealth Management each up 9% with Business Banking revenue up 6%.
• The bank also recapped its recent investments for growth including the purchase of Citigroup's Canadian MasterCard business and CIT asset based lending business, as well as significant branch expansion and investment in its mobile banking application and brand.
• In terms of market position, CIBC highlighted it was #1 in cards, #2 in mortgages, retail brokerage (revenue & assets) and ABMs, #3 in branch network, personal deposits/GIC (up from #4), business deposits and mutual funds. The improvement in market positioning in personal deposits/GICs is due partly to branch expansion & relocation. CIBC lagged in business lending at #4 and personal lending at #5. The gap in share on personal lending is $8 billion.
• CIBC provided a three-year target for the retail bank at $3 billion versus its $2.16 billion YTD Q3/10 annualized, representing an 11.6% CAGR.
• In terms of investing in its branch network, CIBC has expanded evening and Saturday hours at 400 branches and is building, relocating and expanding 70 branches by 2011.
• The bank acquired $2 billion in MasterCard outstanding balances and 570,000 active accounts from Citigroup. The acquisition increased CIBC's credit card balances outstanding to $15.8 billion and market share to 18.7% from 16.6%. The Citigroup MasterCard purchase is immediately accretive to earnings. The bank is not taking on credit card delinquent accounts.
• Mortgage & personal lending growth have been driven by mortgages at 7% with personal lending lagging at 2% partially due to a conservative lending approach. The bank loan growth outlook varied by product with mortgages at 4%, personal loans 5%, credit cards 2%-4% and business lending 5%-8%.
• In Wealth Management, CIBC cited it was #3 among the banks and #5 in the industry and leading in managed solutions (wrap products). Mutual fund sales performance has improved with 2010 long-term sales the highest since 2004.
• The presentation in general provided guidance on the bank's overall strategies in each of its three segments, Personal Lending, Business Banking, and Wealth Management.
• Personal and business lending are two products where the bank is underrepresented, providing opportunity for market to above-market growth.
• The presentations were positive although financial information was light. We expect improved performance from CIBC Retail Markets going forward. However, major Canadian banks are focused on retail banking and with slowing volume growth, competition is expected to remain stiff.
