Big 5 Banks Led the 2009-2019 TSX Bull Market Run

The Globe and Mail, Tim Shufelt, 8 March 2019

On Day 1 of the recovery from the worst bear market since the Great Depression, the big Canadian banks led the charge on the Toronto Stock Exchange.

Royal Bank of Canada’s shares rose 14 per cent on March 10, 2009, as investors stormed back into the much-maligned financials sector. RBC’s fellow Big Five incumbents all posted double-digit gains of their own.

That day would prove to be the inflection point that separated the global financial crisis and devastating recession from one of the best bull markets in history.

It would also usher in a decade of bank dominance in the Canadian stock market, displacing resources as the main driver of domestic equities.

In the 10 years since the market bottomed out, the Big Five together have contributed nearly half of the total returns generated by the S&P/TSX Composite Index. Just five stocks contributed 47 per cent of a decade’s worth of gains in an index that contains around 240 of the country’s largest companies.

“The banking sector hasn’t really had a bump in the road in 10 years,” said Tom Bradley, president of Steadyhand Investments. “They’ve just had these howling tailwinds.”

But it’s hard to imagine those tailwinds being quite as intense in the years ahead. The burdens from indebted households, a moderating economy and a slowing real estate boom mean the next decade in banking, and bank investing, is unlikely to have the same sheen as the gilded decade past.

In the aftermath of the global financial crisis, Canada’s banking sector became the envy of the developed world. With relatively little exposure to the toxic securities that felled 25 U.S. banks in 2008 and destabilized the global financial system, Canada’s banks remained quite profitable. They didn’t even cut their dividends.

The World Economic Forum ranked the Canadian banking system as the world’s soundest, while U.S. President Barack Obama recognized Canada as “a pretty good manager of the financial system.”

While the banks themselves were spared from the worst of the carnage, their stocks fully participated in the crisis. Amid fears of contagion infecting the Canadian financial system, the diversified bank group declined in share price by 58 per cent from their 2007 peak to the market’s 2009 nadir.

“In a downturn, investors don’t look at earnings any more,” said Bill Dye, a banking analyst and portfolio manager at Leith Wheeler.

The combination of operational strength and cut-rate valuations set the Canadian bank stocks up for a monumental rebound. Citigroup Inc. provided the spark. After the company survived only by virtue of a bailout in the form of US$476.2-billion in cash and guarantees, Vikram Pandit, Citi’s beleaguered chief executive, told his employees on March 9, 2009 – the very day of the market bottom – that the bank turned a profit in the first two months of the year.

By the end of 2009, Canada’s group of big bank stocks had more than doubled. There was much more to come. Over 10 years, the banks have generated an average total return of more than 18 per cent a year. Not only did that performance trounce the broader Canadian stock market, it beat the S&P 500 index through the longest bull run in history. It even beat Warren Buffett – Berkshire Hathaway Inc. shares have returned 15.7 per cent a year over the same period.

Operating within a comfortable oligopoly, banks have undergone a decade of growth and become wildly profitable in the process. In fiscal 2018, the six largest banks generated $45.3-billion in earnings, amounting to more than $1,200 for each Canadian. They have thrived off of a generational housing boom, have come to dominate the wealth-management business in Canada and have used their domestic proceeds to expand well beyond Canada’s borders.

“They got through the crisis okay. They’ve grown their dividends. They put up these unbelievable numbers. What’s not to love?” Mr. Bradley said. In return, Canadian investors have developed a cult-like loyalty to the banks, which form the cornerstone of countless Canadian investment portfolios. “I get people that ask me, ‘Why wouldn’t I just own the five banks?’” Mr. Bradley said. That kind of radical concentration is one sign that sentiment toward the banks is overwhelmingly favourable, he added.

And yet, bank valuations never seem to get too out of hand. Despite their vaunted status among the investing masses, the big banks trade at an average forward price-to-earnings multiple of about 10.5. That’s considerably less than the valuation on the S&P/TSX Composite Index of about 15.

“Their valuations just don’t seem to get higher over time,” said Christine Poole, CEO of Toronto-based GlobeInvest Capital Management. “Some bank CEOs argue that they are fairly defensive and stable businesses, and ask why they’re not getting a higher multiple.”

But there is a good reason such highly leveraged businesses trade at a significant discount to the market. As a result of high leverage ratios, “when things turn down, the banks tend to get hit very hard,” Leith Wheeler’s Mr. Dye said. “Retail investors sometimes forget that.”

The financial crisis served up a good reminder of that, not that anyone’s anticipating Canadian bank stocks to face such a severe test any time soon. But the forces that have elevated the mighty banks since the financial crisis are undoubtedly weakening. With household debt near record levels, the average Canadian has little room left to borrow.

“Over the next few years, loan losses are likely to be higher than they are today, even if there isn’t a recession,” Mr. Dye said. “And earnings growth is almost assuredly going to be lower.”

;

Preview of Q1 2019 Earnings

The Globe and Mail, David Berman, 18 February 2019

Canada’s biggest banks are set to report their fiscal first-quarter results starting this week, and once again the focus is on deteriorating economic conditions and slower loan growth – a theme that ran through the latter half of 2018.

Royal Bank of Canada will kick things off on Friday, when it reports results for the three-month period ended Jan. 31. Next week, Bank of Montreal and Bank of Nova Scotia will report their respective financial results on Tuesday, followed by National Bank of Canada on Wednesday.

Canadian Imperial Bank of Commerce and Toronto-Dominion Bank will conclude the reporting season with their results on Feb. 28.

On average, analysts are expecting profit to increase just 3 per cent for the Big Six banks, year-over-year, and a mere 1 per cent from the previous quarter.

The subdued forecast reflects dimming optimism for the Canadian economy.

Many economists believe that the Bank of Canada has put interest-rate increases on hold, at least for the first half of this year. While employment gains were strong in January, there are continuing concerns about the Canadian housing market – where sales in Vancouver and Toronto have declined – and the energy sector, along with global uncertainty regarding trade and even the waning strength of the U.S. economy.

Bond yields, which surged last year in anticipation of rate hikes, fattening bank margins on loans, have fallen substantially. While lower yields will reduce borrowing costs for consumers, they suggest that demand for loans could be tempered if the economy stumbles.

RBC Dominion Securities recently reduced its price targets on a number of Canadian bank stocks, arguing that the various headwinds will leave shares trading at subdued valuations (or relatively low price-to-earnings ratios).

“Our forecast for relatively slower EPS [earnings per share] growth for the banks in 2019 and 2020 largely reflects our view that continued deceleration in domestic loan growth will slow revenue growth,” Darko Mihelic, an analyst at RBC Dominion Securities, said in a note.

He expects that personal loan growth will slow to just 2.9 per cent in 2019, down from 4.1 per cent in 2018, as today’s higher interest rates and sluggish economy weigh on mortgage underwriting activity. As a result, he estimates that revenue expansion for the Big Six banks will slow to 4.3 per cent in 2019, down from 5.7 per cent last year (when adjusted for acquisitions).

But the first-quarter results, in particular, have something else pressing on them: Volatile markets. The S&P/TSX Composite Index, among other major indexes, fell sharply from the end of August through most of December, overlapping with the banks’ fiscal quarter.

Analysts expect that the declines will weigh on banking activities such as trading and asset management.

“Everything from mutual fund fees to underwriting revenues will likely have been down. Trading, as ever, is a wildcard, but we do expect a sequential decline on that line as well,” Robert Sedran, an analyst at CIBC World Markets, said in a note.

The good news? Dividends are set to rise. Analysts expect that RBC, Scotiabank and TD will boost their quarterly pay outs in keeping with their recent pace of increases.

As well, bank stocks, which were hit hard last year, are now recovering nicely. The Big Six are up more than 9 per cent in 2019.

The rebound suggests that share prices may have been reflecting concerns over the economy back in December, when bank stock valuations fell to their lowest levels since the financial crisis a decade ago, and are now anticipating an improvement over the remainder of the year.

Indeed, some analysts believe that the low profit growth for the big banks in the fiscal first quarter will mark a starting point from which the banks will add earnings power as the year progresses, as loan losses remain low, profit margins expand slightly and bank revenue grows at a faster pace than expenses.

Mr. Sedran expects that the Big Six will report earnings growth of 6.5 per cent for fiscal 2019. While that marks a notable slowdown from 12 per cent in 2018, it implies that earnings will improve after a weak first quarter.

“While we share at least directionally the market’s concerns about the age of the economic cycle, we are unconvinced that it will show its age in fiscal 2019,” Mr. Sedran said.

;

RBC Lowers Outlook on Banks

The Globe and Mail, David Berman, 1 February 2019

Canadian bank stocks have rebounded over the past six weeks after touching their lowest valuations since the financial crisis. But an enduring recovery rests on profit and revenue growth over the year ahead, and the outlook here is murky at best.

For sure, the stocks are enjoying some momentum right now. The Big Six have risen 11.4 per cent since Dec. 24, when the stocks traded at just 9.2-times estimated earnings, the lowest price-to-earnings ratio in nearly a decade.

But in the run-up to the start of the banks’ fiscal first-quarter reporting season on Feb. 26, some observers see potential hurdles, given a slowing Canadian economy and weak lending growth.

“We anticipate the economy will pick up again in 2020 – but during the slower economic period in 2019, risks will be elevated,” Darko Mihelic, an analyst at RBC Dominion Securities, said in a note to clients.

He cut his target prices (where he sees Canadian bank stocks trading within 12 months) by an average of 7.7 per cent on Friday, suggesting dimming enthusiasm. His target on Bank of Montreal fell to $112 from $126 previously, marking the biggest revision. His target on Toronto-Dominion Bank fell to $83 from $92.

Okay, the new targets imply average gains of about 17 per cent over the year ahead, which sounds good. But the revisions also suggest that bank stocks may be cheap for a good reason, which other analysts have also pointed out.

Gabriel Dechaine, an analyst at National Bank Financial, noted last month that low valuations imply serious concerns about the Canadian housing market. Of particular note: Residential mortgage growth – just 3 per cent in November, year-over-year – has descended to its lowest level in more than 20 years.

“Low valuations alone won’t attract investors to the sector. Indeed, we believe early 2019 housing issues could weigh on re-rating potential at least until we see stabilization in housing prices/mortgage volumes etc.,” Mr. Dechaine said in his mid-January note.

Mr. Mihelic put some numbers to his concerns. He reduced his 2019 and 2020 profit outlook for five of the Big Six banks (since he works for Royal Bank of Canada, RBC falls outside his coverage), by an average of 1.6 per cent.

He also cut his valuation targets for four banks (excluding National Bank of Canada, which is being buoyed by a strong Quebec economy, where it generates 58 per cent of its revenue), each by 0.5-times earnings. For example, he now expects TD will trade at 11.5-times earnings, down from a prior valuation target of 12-times earnings. His target for BMO falls to 11-times earnings, down from 11.5.

“We are lowering our target multiples for a number of reasons including a softer economic outlook and rising recessionary risks/late cycle concerns which could potentially lead to higher provisions for credit losses (PCLs) under IFRS 9,” Mr. Mihelic said, referring to new financial reporting standards.

Some of his numbers are sobering. He expects that personal and commercial loan growth will subside to just 2.9 per cent in 2019, down from 4.1 per cent in 2018 and 5 per cent in 2017.

Although business loan growth this year should be much stronger, at 6.9 per cent, that would mark a substantial slowdown from 11.3-per-cent growth last year.

Investors can always hope that the big banks will be able to squeeze more profit out of their revenues by cutting costs and introducing new technology. But even here, Mr. Mihelic is anticipating far more modest gains ahead. He expects that the banks’ efficiency ratios, which compare expenses with profit (lower is better), will dip only slightly in 2019, to 54.6 per cent from 54.8 per cent in 2018.

The takeaway here? Low valuations aren’t a compelling reason to bet big on banks right now, unless you can handle some bumps. “While the medium-term outlook is shrouded by uncertainty, we still like bank stocks over the longer-term,” Mr. Mihelic said.

;

Banks Brush Off New Capital Rules, Saying They Have ‘No Impact’

The Globe and Mail, James Bradshaw, 9 January 2019

The chief executives of Canada’s largest banks are shrugging off tougher capital requirements introduced by the banking regulator, saying the change will have no impact on plans for acquisitions, dividend hikes or share buybacks.

Last June, the Office of the Superintendent of Financial Institutions (OSFI) revealed for the first time that the country’s six largest banks must hold extra capital, called the “Domestic Stability Buffer,” as an added cushion to help them cope in the event of an economic downturn. The regulator promised public updates on the buffer at least twice a year, and at its first opportunity in December, chose to boost it to 1.75 per cent from 1.5 per cent of a bank’s risk-weighted assets, starting April 30.

The move caught investors and analysts by surprise, as OSFI highlighted “systemic vulnerabilities” in Canada’s economy, suggesting that it is watching closely for signs of strain. Analysts speculated that OSFI’s swift move could fuel expectations that the buffer would continue to be nudged higher, adding to constraints imposed on banks since the last financial crisis.

But at a conference in Toronto on Tuesday, the CEOs of Canada’s big banks responded with a collective yawn.

“It doesn’t change anything,” said Toronto-Dominion Bank CEO Bharat Masrani.

Bank of Montreal CEO Darryl White said he sees “no impact” on the way he manages the bank, even if OSFI were to reduce the required buffer again, “because we wouldn’t chase them down.”

Royal Bank of Canada CEO Dave McKay said RBC will continue to “manage our surplus capital with the same margins," and Canadian Imperial Bank of Commerce CEO Victor Dodig said the move “hasn’t changed our view on what is the right level of capital for CIBC.”

An OSFI spokesperson declined to speculate on “future actions by the banks should stress conditions materialize,” but said that banks “are responsible for their own capital management strategy.”

In recent public comments, OSFI officials have voiced concerns over high household debt relative to incomes and uncertainty about housing markets, even as bank executives insist that Canada’s economic fundamentals are still sound. In raising the required buffer, OSFI assistant superintendent Jamey Hubbs said that “in light of positive credit performance and generally stable economic conditions, now is a prudent time for banks to build resilience against future risks to the Canadian financial system."

Currently, Canada’s Big Six banks must keep their common equity Tier 1 (CET1) capital ratios – a key measure of a bank’s resilience – at or above 9.5 per cent. That consists of a base level requirement of 4.5 per cent, a 2.5-per-cent “capital conservation buffer,” an extra 1-per-cent surcharge because of their size, plus the newly disclosed Domestic Stability Buffer. After April 30, the minimum will be 9.75 per cent.

Yet Canada’s six biggest banks had CET1 ratios ranging from 11.1 per cent at Bank of Nova Scotia, which recently completed a string of acquisitions, to 12 per cent at TD, as of Oct. 31, and appear to believe they’ve built adequate reserves.

“We’re so massively ahead of the buffer anyways, it doesn’t change anything,” said National Bank of Canada CEO Louis Vachon.

;

Bank Stocks Have Seldom Looked This Enticing

The Globe and Mail, David Berman, 2 January 2019

Add Canadian banks to the long list of stocks that delivered dismal returns in 2018. But some encouraging developments have emerged from the sell-off: Valuations are low and dividend yields have risen to 4.6 per cent on average, pointing to a good buying opportunity right now.

First, let’s recap what happened in 2018.

The Big Six bank stocks fell by an average of 12 per cent (not including dividends). Or, if you look at the S&P/TSX Composite Diversified Banks industry group, which tracks all six banks but weights them according to market capitalization, the bank stocks fell 11.2 per cent last year.

The group delivered strong profit growth of 13 per cent, year-over-year. And the banks hiked their quarterly dividends by an average of 7.9 per cent, continuing an impressive clip.

But none of this apparently mattered: Share prices fell amid weak oil prices, low mortgage growth and signs of a slowing global economy.

Canadian Imperial Bank of Commerce was the weakest of the Big Six banks, declining 17 per cent as concerns persisted about the Canadian economy and housing market, and pushing aside Bank of Nova Scotia as the year’s lagging bank stock after CIBC took a particularly sharp downturn in December.

Toronto-Dominion Bank was the best performer, but nonetheless declined 7.9 per cent. Royal Bank of Canada was a close second, with a decline of 9 per cent.

Falling share prices and rising profits translate into tempting valuations, though. According to research from RBC Dominion Securities, the Big Six trade at nine times estimated 2019 profits. That’s a bargain next to the 10-year average price-to-earnings ratio of 11.1. CIBC, the hardest-hit bank stock in 2018, trades at a mere eight times estimated profit.

Dividends are also enticing. The Big Six yield an average of 4.6 per cent, led by CIBC at 5.3 per cent. That’s hard to ignore when the yield on the Government of Canada five-year bond is back below 1.9 per cent.

There are various ways to approach the bank sector, but nothing really worked in 2018.

The strategy of buying the prior year’s worst-performer – Bank of Montreal for 2018 – outperformed the sector by one percentage point last year, which is okay if you ignore the fact that BMO fell 11.3 per cent. (For this strategy, we use returns from the biggest five banks, which declined an average of 12.3 per cent last year). Let’s hope that CIBC, the pick for 2019 using the laggard strategy, performs better this year.

Exchange-traded funds that focus on the Big Six provide instant diversification and regular rebalancing for a relatively modest fee. Unfortunately, these ETFs failed to deliver sector-beating returns last year.

The BMO Equal Weight Banks Index ETF (ticker ZEB) holds all six bank stocks in equal amounts and rebalances regularly. This means that if one bank stock lags the others, the ETF manager will buy it in order to maintain the right balance. It also means National Bank of Canada has the same weighting as giant Royal Bank of Canada.

The ETF declined 11.8 per cent in 2018. That’s in line with the 12-per-cent average decline for the Big Six, but slightly worse than the 11.2 per cent decline for the S&P/TSX Composite Diversified Banks industry group.

The RBC Canadian Bank Yield Index ETF (RBNK) weights the Big Six banks according to their dividend yields – the two highest-yielding stocks each receive a 25-per-cent weighting, followed by a 16.7 per cent weighting for the next two stocks and an 8.3 per cent weighting for the last two stocks.

That’s an appealing approach for dividend-loving investors. However, the ETF declined 12.5 per cent in 2018. Dividends ease the pain, but not enough to make the fund a winner.

Discouraged? Don’t be. Canadian big bank stocks have a remarkable track record of rebounding from sell-offs. Whether you invest in one stock or a basket of stocks, cheap valuations should work in your favour in 2019 – and you’ll be collecting a handsome dividend while you wait for the rally.

;

How Blocked Mergers Foiled Banks' Ambitions — and Forced the Big Six to Innovate

The Globe and Mail, James Bradshaw, 25 December 2018

When Royal Bank of Canada and Bank of Montreal announced a surprise plan to merge on Jan. 23, 1998, the news landed like a bombshell. By the time then-finance minister Paul Martin dashed their hopes less than a year later, the notion of mega-bank mergers had turned radioactive.

It was 20 years ago, on Dec. 14, 1998, when Mr. Martin turned down RBC and BMO’s plan, as well as a subsequent tie-up proposed by Canadian Imperial Bank of Commerce and Toronto-Dominion Bank. His ruling stamped big bank mergers as politically untouchable in Canada, and that imprint is still clearly visible today.

The mergers, had they been allowed, would have dramatically reshaped Canada’s banking sector, condensing an already cozy industry while setting the combined banks on a fast track to extend their influence in the rapidly consolidating U.S. banking market.

“It became pretty obvious that nobody other than the banks thought it was a good idea,” says Charles Baillie, who was chief executive officer of TD at the time, in an interview.

Instead, after a hard-fought public campaign lasting 11 months, each bank was forced to resort to its own plan B, with varying success. With diverging strategies, Canada’s leading banks carved out more distinctive identities over the next two decades, some gaining influence while others lost ground.

The agreement that set the merger debate in motion famously came to life over eggnog and hors d’oeuvres at BMO’s Christmas party on the 68th floor of its Toronto offices, late in 1997. John Cleghorn, who was RBC’s chief executive, crashed the party to bend the ear of his BMO counterpart, Matthew Barrett.

Their tête-à-tête was only one of a series of merger talks leaders from several of Canada’s largest banks had quietly held with each other in the late 1990s. A wave of consolidation among U.S. and European banks made Canadian executives wary that they would be vulnerable on their own turf if they didn’t get bigger and improve their clout abroad. Mr. Barrett warned that Canadian banks risked ending up like “the corner hardware store waiting for Home Depot to arrive to put it out of business."

Mr. Cleghorn, as the leader of the country’s largest bank, felt strongly that RBC needed to be first out of the gate. After a month of intense negotiations, a deal was struck late on the evening of Jan. 22. But it wasn’t until the next morning that the banks tried to give Mr. Martin a heads up.

At the time, lawyer Harold MacKay was leading a federal task force that was in the midst of drafting a report on the future of financial institutions. Mr. Martin, who has not been in favour of the mergers from the start, says the banks should have waited for the report.

Internally, the banks debated how far in advance they should make Mr. Martin aware of such a blockbuster deal, given that he would be its arbiter. There were legal concerns to consider, but also fears that Mr. Martin or prime minister Jean Chrétien – who also instinctively opposed the mergers – might shut the plan down before it ever got started.

“If we had not tried, we would not have found out what the rules were going to be – there were no rules,” Mr. Cleghorn says.

Once the merger was announced, bankers felt there was a chance they could win public support – which proved to be a fatal miscalculation. “It landed like a lead balloon in the court of public opinion,” says Konrad von Finckenstein, who was commissioner of the Competition Bureau, tasked with examining the merger’s impact.

When CIBC and TD announced their own merger agreement in April, 1998, the odds of either deal winning federal approval only grew more remote. “We weren’t that optimistic that we’d be able to pull it off, but we thought defensively, we can’t afford to have the Royal and the Montreal combine and be that much larger,” Mr. Baillie says.

That other banks would feel pressure to follow suit “was entirely predictable,” Mr. Martin says. What proved harder to anticipate was the strength of the backlash. Small businesses, in particular, feared they would be left with fewer options, and Mr. Martin confirms that “the business community was not in favour, by and large.”

In the early going, the banks' own arguments for the deal’s merits weren’t helping. Mr. von Finckenstein remembers receiving separate visits from Mr. Cleghorn and Mr. Barrett, each making the case it was “blindingly obvious” that a merger would make for a more efficient banking system and benefit shareholders. “I remember going away from them saying, ‘You never mentioned your customers,’" Mr. von Finckenstein says.

It wasn’t until the later stages of the campaign that the two banks began making public pledges about preserving bank branches, catering to small businesses, freezing some service charges and finding new roles for employees whose jobs would be displaced. But this came too late, says David Moorcroft, who was RBC’s vice-president of public affairs. “I think we were fighting a rearguard action then.”

The final blow came when the Competition Bureau released a damning report detailing ways the mergers would diminish competition in banking, from access for small businesses to credit-card concentration. Some concerns could have been addressed, but that would have required major divestitures – for instance, the Competition Bureau would not have allowed RBC and BMO’s investment banking arms, Dominion Securities Inc. and Nesbitt Burns Inc., to join together.

Mr. Martin welcomed input from the Bureau. “He needed something to justify turning it down,” Mr. von Finckenstein says. “He was inclined to do it but he needed the ammunition, and we presented him with the ammunition.”

Some bankers were angry when Mr. Martin killed the mergers, but their bitterness faded over time.

“[Mr. Martin] had to do what he had to do, and I was trying to do what I had to do. We all moved on. But we also knew what the score was," Mr. Cleghorn says.

Discussions about mergers carried on in the background for years, and BMO even took a second run at a merger in 2002, this time with Bank of Nova Scotia, which had been vocally opposed to mergers in 1998 when it was unable to find a dance partner. But the banks failed to win a blessing from new finance minister John Manley, and abandoned the plan.

At TD, a backup plan was already in motion. In advance of Mr. Martin announcing his decision in late 1998, he called bank CEOs to Ottawa to brief them. Mr. Baillie hitched a ride to Ottawa on CIBC CEO Al Flood’s plane, and on the flight, said to him, "'Well, it looks like we’re competitors again, so you might want five minutes alone with the finance minister, and I’d like to have five minutes alone with him.’ So we agreed to that.”

Mr. Baillie says he used his five minutes to test Mr. Martin’s willingness to allow TD to acquire Canada Trust, a major force in retail banking that had attracted takeover interest from several lenders. Mr. Martin’s response, as Mr. Baillie recalls, was “as long is it isn’t one of the [Big Five banks]." Mr. Martin says he doesn’t remember that exchange.

In no time, TD was on the phone with the largest shareholders in Imasco Ltd., which owned Canada Trust. In 2000, TD struck a deal, pulling off a coup that helped transform what was then Canada’s fifth-largest lender. TD is now neck and neck with RBC for the title of Canada’s largest bank, with $1.3-trillion in assets.

“I think if [the mergers of 1998] had gone through, we would not have had a competitive advantage vis-à-vis the Royal and the Montreal,” Mr. Baillie says. “From TD’s point of view, it couldn’t have worked out better.”

Other banks took longer to regroup. RBC ultimately bought North Carolina-based Centura Bank in 2001, then sold it in 2011 after struggling to gain traction in American retail banking, though it also built a New York-based capital markets arm that now ranks among the top 10 U.S. investment banks. CIBC, which was Canada’s second-largest bank at the time of the mergers, plunged aggressively into ill-fated forays in U.S. investment banking and electronic retail banking that led to massive write-downs. Over time, CIBC fell to fifth place among Canada’s largest banks, and only recently re-established its U.S. footprint with a commercial and private bank based in Chicago. BMO gradually built its strength in commercial and retail banking in the U.S. Midwest through BMO Harris Bank, which it had already acquired in 1984. And Scotiabank largely bypassed the United States, investing instead in more emerging markets such as Latin America and the Caribbean.

"The biggest lasting impact [of the blocked bank mergers] is that Canadian banks had to be more innovative about how they would continue to grow,” Mr. Moorcroft says. “Before that, the strategies of the big banks were pretty similar.”

The fallout was tangible in other important ways. Discussions over mergers between the government, regulators and the Bank of Canada shaped concerns about banks becoming too big to fail – a problem that came into sharp focus in 2008 with the onset of a global financial crisis. Canadian banks were still building their U.S. footprints and had avoided many of the worst excesses of their peers abroad, seizing the opportunity to snatch up talent cut loose by floundering U.S. banks.

Denying the mergers may also have strengthened the hand of Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), in restraining the banks. “I’m sure OSFI was under tremendous pressure to loosen the reins and allow all sorts of things that were happening in the States,” Mr. von Finckenstein says. “If we had had even larger entities, and fewer, it would have been so much harder for them to resist the pressure.”

Today, there is broad agreement that a merger between any of Canada’s largest banks is still verboten, no matter the government of the day, except in a crisis in which a major Canadian bank would need rescuing. “I think all you could do is lose votes if you supported it,” Mr. Baillie says.

Then again, Mr. Cleghorn says, “you never say never.”

;

Banks Made $45.3-billion in 2018. Who’s Shining Brightest?

The Globe and Mail, David Berman, 11 December 2018

Fans of Canadian bank stocks will appreciate this number: $45.3-billion.

That’s the total profit generated by the Big Six banks in fiscal 2018 (which ended Oct. 31), and the gargantuan number reinforces why the banks have been delivering stellar gains and rising dividends over the long term.

Buying all six bank stocks and holding on during rallies and downturns makes a lot of sense. But it’s also worth taking a closer look at their individual performances to gain an understanding of which bank is leading the way. Here are a number of ways to slice and dice their financial results.

• BIGGEST PROFIT GAIN, 2018: TD

The Big Six banks’ fourth-quarter results can be summarized like this: Profits went up by an average of 13 per cent year-over-year, and share prices went down.

Toronto-Dominion Bank is the quarterly winner, in terms of its year-over-year adjusted profit (which ignores some one-time items): TD reported a gain of 20 per cent, which analysts described as solid, even as they expressed some caution over the bank’s rising expenses. Bank of Montreal was a close second, with 19-per-cent growth, followed by Royal Bank of Canada at 16 per cent.

For the full fiscal year, TD is also the profit powerhouse. Its 2018 adjusted profit, on a per-share basis, increased 16.8 per cent from 2017.

Not so keen on these adjustments? If you look at net earnings, which can move with taxes, divestitures and acquisitions, Canadian Imperial Bank of Commerce wins with a gain of 11.4 per cent.

• BEST “BEAT” RATE, 2018: CIBC

During earnings season, stocks can be judged by how they live up to analysts’ expectations. In their fourth quarter, Big Six banks delivered adjusted earnings that were remarkably close to expectations: They surpassed the consensus by 1 per cent, on average.

RBC had the biggest beat rate, at 5.7 per cent. Over the full year, though, RBC was in the middle of the pack, with an average beat rate of 3.3 per cent over four quarters. TD did better, with an average beat rate of 4.6 per cent. CIBC tops them all with an average beat rate of 5.4 per cent.

• BEST DIVIDEND GROWTH, 2018: TD

If you look strictly at indicated dividend yields, then CIBC is the winner here: Its 5.1 per cent yield – based on its latest distribution and helped by a declining share price and rising quarterly payout – is the best of the bunch.

However, many longer-term investors appreciate banks that raise their quarterly payouts at a faster pace. Looked at from this perspective, Toronto-Dominion Bank is the winner. TD raised its payout by a dazzling 11.7 per cent in fiscal 2018 – well more than CIBC’s 4.6-per-cent dividend hike for the full year and the 7.9 per cent average among the Big Six banks.

This may explain why TD’s dividend yield is the lowest of the group: At just 3.85 per cent, the yield implies expectations for brisk growth.

• HIGHEST CET1 RATIO: TD

This sounds a bit wonkish, but bear with us. The Common Equity Tier 1 ratio is a measure of capital that is watched by regulators to ensure that a bank can withstand a downturn. A higher ratio means that a bank has a bigger buffer, and the bank can lower it by buying back shares or making deals when times are good.

TD is the winner here, with a CET1 ratio of 12 per cent. That’s not only the highest among the Big Six; it also represents the biggest year-over-year gain, at 1.3 percentage points. There is a downside here: A high ratio means that more capital is sidelined rather than making profit – but a bit of fat might be just the thing if the market is worried about the economy.

• BEST STOCK PERFORMANCE: TD

Bank stocks have been struggling this year, and many observers are puzzled. Maybe, part of the problem is that the overall stock market has turned volatile. Then there’s also rising borrowing costs, indebted consumers, tumbling oil prices and concerns about Canada’s housing market.

The Big Six stocks are down an average of 9.4 per cent since the start of January, not including dividends. Canadian Imperial Bank of Commerce has fared the worst, falling 13.9 per cent. Toronto-Dominion Bank has performed best, but its decline of 5.8 per cent is not going to inspire celebrations.

;

Banks Brush Off Oil-Price Crash

The Globe and Mail, Tim Kiladze & Alexandra Posadzki, 9 December 2018

Canada’s largest banks are brushing off the recent crash in domestic-crude prices, confident that their loan books are in solid shape.

Collectively, the Big Six banks reported $45-billion in annual profits for fiscal 2018, which ended on Oct 31. Yet on recent conference calls to discuss their fourth-quarter earnings, analysts pressed executives for details about their loan exposures to oil and gas companies, worried that a crisis could be brewing behind the scenes, resulting in large write-downs.

All six banks responded in the same fashion: This is not 2016. There was barely a crisis for them then, and there definitely isn’t one now.

“Since 2015 and 2016, we’ve ‘up-tiered’ the companies we deal with,” Dieter Jentsch, head of global banking and markets at Bank of Nova Scotia, said on a conference call. “And I have to say to you that the balance sheets that we see in the business have never been as strong, and the management teams are very cost-conscious.”

When the global price of crude plummeted below US$30 per barrel in early February, 2016, some analysts and investors worried. At the time, about 80 per cent of Royal Bank of Canada’s outstanding energy loans were made to non-investment-grade companies, while National Bank of Canada had large loan exposures to junior oil and gas companies.

Ultimately, the banks emerged relatively unscathed. But to be safe, a number have taken steps to protect themselves. National Bank chief risk officer Bill Bonnell said on a conference call that the bank’s oil and gas loan portfolio has been “meaningfully rebalanced since 2015,” adding that its outstanding loans in the energy sector “have been brought down significantly.”

As a percentage of its total loan portfolio, National Bank has cut its energy exposure in half over the past three years. Oil and gas now makes up 1.7 per cent of its total loan book, down from 3.6 per cent at the peak in 2015.

But Canada’s banks have not cut ties with energy companies en masse. In fact, total loan exposure to the sector across the Big Six hit $47-billion at the end of fiscal 2018, up 4.8 per cent from $44.9-billion three years prior.

That statistic might raise concerns among bank investors because crude prices are volatile again. In October, Western Canadian Select, a benchmark for Alberta heavy oil, sold at a discount to West Texas intermediate oil of some US$50 - more than double the historical average. (That discount had shrunk to only US$15 on Friday after Alberta Premier Rachel Notley enforced production cuts on the province’s oil sands producers.)

Canada’s banks are not fazed. And outsiders appreciate why.

To start, the energy sector isn’t in need of as much debt. “There’s generally less investment going on in the oil patch,” David Beattie, credit analyst at Moody’s Investors Service, said in an interview. Just last week, oil sands giant Canadian Natural Resources cut its 2019 capital spending by $1-billion to $3.7-billion.

Energy loans as a percentage of the Big Six banks’ total portfolios have fallen over three years. Oil and gas lending has climbed 4.7 per cent, but total lending has jumped 22.5 per cent.

Canada’s banks have also cut their exposures to riskier junior oil and gas companies. National Bank’s Mr. Bonnell said on a conference call that its energy relationships "have been refocused on larger, well-capitalized oil and gas producers and deepened with large investment-grade pipeline clients,”

But rivals have, too, and often it happened simply because smaller producers have been disappearing. “There’s been a number of mergers and takeovers, and a number of companies have just gone under,” Raymond James energy analyst Jeremy McCrea said in an interview.

Since the start of 2015, 160 North American energy companies have filed for bankruptcy, according to Haynes and Boone LLP. Of these, 18 were Canadian, the largest of which was Endurance Energy Ltd., which had US$475-million in debt.

Market dynamics have played a role too, diverting loans away from riskier junior companies. Many junior energy companies were financed through reserve-based lending, and under this model, banks use a company’s oil and gas reserves as collateral.

“As oil prices (especially WCS) have declined, the value of the reserves decreased, as did the size of the bank lines [of credit]," Ravikanth Rai, a credit analyst at DBRS Ltd., wrote in an e-mail. “This forced the companies to deleverage as opposed to the banks having an active strategy to reduce exposure to the sector.”

And then there is the recent move in WCS prices, which narrowed the discount to WTI.

The banks, of course, are not completely out of the woods. Energy prices are inherently volatile, and trade tensions between the United States and China are rising, hurting the global economic outlook.

But the odds are in the banks' favour. Since the 2008 global financial crisis they have continually added capital cushions to absorb loan losses, and those levels today are the highest they have ever been.

Their exposure to the sector has also fallen dramatically over three decades. When energy prices plummeted in the late 1980s, oil and gas producers made up 7 per cent of total bank loans. By 2016, they were 2 per cent of the collective portfolio. Today, they are 1.7 per cent.

“Though the market never believes the banks when they say their exposures are manageable, the numbers clearly demonstrate that the sector has become more adept at credit risk management over time," Scotiabank financial services analyst Sumit Malhotra wrote in an e-mail.

;

BMO Q4 2018 Earnings

The Globe and Mail, Tim Kiladze, 4 December 2018

Bank of Montreal’s personal and commercial banking profits surged in the United States over the past fiscal year, but the uncertainty of a repeat performance is clouding the lender’s outlook.

Similar to rivals Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, BMO operates a sizable bank in the United States that focuses on traditional lending. After years of underwhelming earnings, the Chicago-based unit saw profits jump 35 per cent, to $1.4-billion, in the fiscal year that ended Oct. 31.

On the back of this performance, BMO is making U.S. banking a crucial element of the growth story it is telling investors. “The U.S. segment remains a priority where we’ll continue to grow earnings at a faster pace than the overall bank," chief executive Darryl White said on a conference call Tuesday after reporting a fourth-quarter profit of $1.7-billion.

For the full year, the bank earned $5.45-billion, with the U.S. division contributing 26 per cent of that.

The trouble, however, is that the competitive landscape in the United States is changing. Both TD and CIBC noted last week that a battle for loans and deposits is escalating – and it is likely to dent lending margins. BMO’s U.S. head, David Casper, said on a conference call that there is likely to be “modest downward pressure” on lending margins because of such competition.

The current dynamic has changed the outlook in that market. Because the economic recovery from the 2008 financial crisis was painstakingly slow, there was hope across the industry that rising rates would eventually boost bottom lines. While such gains have materialized of late, with lending margins rising, banks are starting to pay more for the deposits that fund their loans. “We expect to pass along higher rates to our customers,” Mr. Casper said of the coming year.

There are also signs in the bond market that the near-decade of U.S. economic expansion could finally be coming to an end – or is at least cooling. The change in expectations hit bank stocks Tuesday, with shares of the four largest U.S. banks dropping an average of 4.7 per cent. BMO shares fell 3.8 per cent.

While BMO’s U.S. P&C bank is only one division of four, its outlook is important because earnings from the Canadian equivalent barely rose in fiscal 2018 and BMO’s capital markets profit has been relatively flat for two straight years.

Wealth management has been a bright spot, with profit from traditional wealth – excluding insurance – climbing 10 per cent in fiscal 2018, but a recent bout of market volatility has dimmed near-term earnings growth, division head Joanna Rotenberg said on the conference call.

“Although we continue to rate BMO favourably over the longer term, several guidance items point to a softer start to fiscal 2019,” National Bank Financial analyst Gabriel Dechaine wrote in a research report, citing U.S. lending margins and wealth-management profits among his reasons.

Despite the short-term uncertainty, commercial lending has continued to be a bright spot for BMO. The bank’s roots in business lending have paid dividends because loan growth in that market is booming. In Canada, total personal and commercial loans climbed 4 per cent in fiscal 2018, but commercial loans jumped 12 per cent; in the United States, commercial loans rose 10 per cent and commercial deposits spiked 16 per cent.

“We had double-digit loan growth in both Canada and in the United States, as well as good deposit growth,” Mr. White said of BMO’s commercial division on the conference call, adding that the growth “is well diversified across sectors and geographies consistent with our approach to building our business within our risk appetite.”

;

Analysts Offer Mixed Outlook on Big Six Q42018 Results

The Globe and Mail, David Berman, 25 November 2018

Canada’s biggest banks will report their fiscal fourth quarter results starting this week, and analysts are expecting a strong finish to the year. But given the stock market is dominated by concerns over slowing economic activity, will investors care?

Bank of Nova Scotia will kick off the reporting on Tuesday, followed by Royal Bank of Canada on Wednesday and Canadian Imperial Bank of Commerce and Toronto-Dominion Bank on Thursday.

Next week, Bank of Montreal and National Bank of Canada will report their results on Dec. 4 and 5, respectively, for the three-month period ended Oct. 31.

Analysts anticipate the Big Six banks will show profit growth of about 12 per cent, year-over-year, driven by their strong international operations, accelerating commercial loan growth and rising interest income. They also expect BMO and National Bank will raise their dividends.

“It has been a good year. Moreover, notwithstanding the share price performance in the last few months, commentary at recent conferences and investor days suggests that fiscal 2019 will be another good one,” Robert Sedran, an analyst at CIBC World Markets, said in a note.

But the quarterly results will arrive during an unsettled period for the stock market. Investors are focusing on the threat of trade tariffs, inflationary pressures and rising interest rates, which is causing wild swings by major indexes. In Canada, higher borrowing costs are weighing on the housing market, which is also adjusting to tighter lending regulations, and low oil prices are hitting the energy sector.

The S&P/TSX Composite Index is down 7.4 per cent this year. Although bank stocks are outperforming the broad index, ever-so-slightly, no one is cheering: The S&P/TSX Commercial Banks Index is down 6.9 per cent this year after taking a 9.5-per-cent nosedive since September.

Will fourth quarter results lift the mood? Analysts expect TD, BMO, RBC and CIBC will benefit from their U.S. divisions, where profits are being driven by recent tax cuts and strong economic activity, and they expect Scotiabank’s profits will get a lift from the bank’s recent acquisition in Chile.

Together, profits from the banks’ U.S. and international operations should rise 31 per cent over last year, according to Sohrab Movahedi, an analyst at BMO Nesbitt Burns.

But expectations for Canadian personal and commercial banking – the meat and potatoes of bank operations – are far more muted. Darko Mihelic, an analyst at RBC Dominion Securities, pegs fourth quarter P&C growth at 3 per cent, year-over-year.

“We maintain our view that Canadian consumer loan growth is likely to slow in an environment of slower GDP [gross domestic product] growth and rising interest rates given the relatively high level of consumer indebtedness," Mr. Mihelic said in a note. "We are of the view that this will ultimately lead to slower net interest income and total revenue growth over the next few years.”

Residential mortgage growth in Canada slowed to just 3 per cent at the end of September. That marks the slowest pace in decades, according to Gabriel Dechaine, an analyst at National Bank Financial. Strong commercial loan growth has been picking up the slack, but analysts are starting to wonder how long this particular engine can keep going.

“With the mortgage market slowing, it begs the question: How sustainable is the trend of double-digit commercial loan growth?” Mr. Dechaine said in a note.

Canada’s energy sector is also likely to emerge as a key theme. The price of Western Canadian Select crude, the heavy bitumen produced in the oil sands, has fallen 74 per cent since July, driving down energy stocks and raising concerns about the impact to the Canadian economy.

The last time oil fell sharply, between 2014 and 2016, bank stocks declined nearly 22 per cent over the same period amid concerns that struggling energy companies would have trouble meeting their debt obligations.

Perhaps bank stocks will perform better this time around. Valuations have fallen to 9.7-times estimated 2019 earnings – well below the 10-year average price-to-earnings ratio of 11.1, according to RBC Dominion Securities – which implies that bad news is already baked in.

As well, the Big Six emerged from the previous energy-fuelled downturn with their operations relatively unscathed, bolstering confidence that these financial behemoths can handle commodity turbulence.

“The banks still managed earnings growth of 6 per cent and 4 per cent in fiscal 2015 and fiscal 2016, respectively, and loan books would have benefited from clean up and monitoring brought on by the last downturn,” Mr. Sedran said.

But the lower oil goes, the bigger the worries.

;

Banks Have An Obsession with Cutting Costs Amid Record Profits

The Globe and Mail, Tim Kiladze, 9 September 2018

The extended bull market and booming economy is the stuff investors used to dream of. But for some, it's just not enough.

Coming off a quarter in which they collectively earned an eye-watering $11.6-billion, Canada's largest banks participated in a Bay Street conference last week where the main focus was, of all things, cost control.

It has been this way for a few years now. Whenever banks report earnings, or their leaders appear at investment conferences, they are grilled about expenses. What started as an obsession with restructuring charges, when the banks were booking ones worth hundreds of millions of dollars around 2014, has morphed into a fixation on so-called "operating leverage."

The term is a fancy one for measuring costs. If a bank has "positive operating leverage," its revenues are growing faster than expenses. “The operating leverage focus … has become a big part of the quarterly process,” Bank of Nova Scotia analyst Sumit Malhotra said at the conference, which was hosted by his employer.

Canada’s banks are riding a bull run for the ages. Since the start of 2010, the sector has delivered investors a total return – that is, one including dividends – of 157 per cent. Canadian energy companies have delivered just 7 per cent over the same time frame.
That impressive return is built on strong earnings growth. The economy has been improving for most of that eight-year period, save for an oil shock that rattled Western Canada starting in 2014. Loan growth has been good and credit losses low. Strong equity markets are also good for fees in the banks' large wealth-management businesses. And yes, part of the healthy profit picture is also a result of cost-cutting.

In 2014, four of the Big Six – Scotiabank, Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce – had just named new leaders. There is a tendency for new chief executives to restructure, to trim the fat that builds up under their predecessors.

But the slashing continued from there, with the banks justifying their cost-cutting by warning of coming threats. The lending wave spurred by record low interest rates was waning, and tech giants such as Alphabet Inc.'s Google and Amazon.com Inc. are starting to wade into financial services. Because the banks have a lot of legacy staff, such as branch tellers, and because their back offices were horribly outdated after years of under investment, restructuring was necessary. Those efforts have trained analysts and investors to study the expense lines.

Cost control, of course, is important. With tens of thousands of employees each, the Big Six lenders can grow bloated. Nothing kills creativity like bureaucracy. But the banks have already racked up $2.6-billion in restructuring charges combined over the last five years. This May, Bank of Montreal announced its fourth restructuring charge in as many years – this time for $260-million. How much is enough?

Some senior bankers are starting to push back. Asked about Royal Bank of Canada's operating leverage at the conference, CEO Dave McKay argued this is not the time to be worried about expenses. For one, there's a shortage of expensive talent in areas such as artificial intelligence that must be hired to prepare for the next technological wave and build what he called the "bank of the future."

"I'd rather build it now with these tailwinds than when you don't have the interest rate tailwind, you don't have the credit risk tailwind, you don't have a strong economy," Mr. McKay said. "So I'm resisting the pressure from the sell side [analysts and investors] to say, 'Hey, what about last month's operating leverage?' "

Another important point: Banking is very much a people business, a fact that is sometimes lost in all the examination of expenses.

National Bank of Canada CEO Louis Vachon, when asked if he'd consider another restructuring charge, said: "You have to remember: These charges, some of them involve firing people, [and that] has a social and human cost to it." Refreshing, and true.

Take it from Tim Hockey, TD's former head of personal and commercial banking and now CEO of TD Ameritrade Holding Corp., who helped build one of the most respected retail banking franchises in North America. "In 10 years of meetings with analysts and stockholders at TD ... I would talk about the importance of what I used to call a 'caring performance culture,' and eyes would glaze over," he told me last year. But he swore by this focus. "Large organizations tend to drive the humanity out. When you're talking about workplaces of more than 1,000 employees, it's the soft stuff" that matters most.

;

BMO & Scotiabank Q3 2018 Earnings

The Globe and Mail, James Bradshaw, 28 August 2018

Bank of Nova Scotia and Bank of Montreal are doing brisk business lending in international markets, helping drive third-quarter profits higher despite worries about potential upheavals in international trade.

The lenders each posted double-digit percentage gains in profit from international operations during the three months that ended July 31 – excluding some one-time costs – partly because of robust growth in loans to businesses, as well as lower foreign tax rates.

Banking outside Canada continues to be strategically vital to Canada’s largest financial institutions, which are keen to tap foreign markets that can provide faster profit growth than the saturated Canadian banking industry. The booming third-quarter returns from abroad for Scotiabank and BMO come as trade tensions appear to be on the cusp of easing. The United States and Mexico reached a bilateral agreement on Monday to resolve key sticking points in negotiations to revamp the North American free-trade agreement. Yet the talks are still mired in uncertainty as Canada rushes back to the negotiating table to address remaining stumbling blocks and try to salvage a trilateral deal.

“I think [Monday’s agreement] was certainly a solid step in the right direction,” said Brian Porter, Scotiabank’s chief executive officer, on a conference call with reporters. “This alleviates a bit of ambiguity in the market’s mind. And we look forward to the next piece of NAFTA being solved, hopefully in a number of weeks, and that’s with Canada’s inclusion."

Third-quarter profit from Scotiabank’s international businesses, which are concentrated in Latin America, was hampered by costs associated with a string of acquisitions the bank has announced over the past year, and fell 15 per cent year over year to $519-million. Excluding those costs, however, Scotiabank’s international profit rose 15 per cent, helped by strong results from Mexico, where a growing economy has boosted demand for the bank’s products.

Of four major banks that have reported results so far, including Royal Bank of Canada and Canadian Imperial Bank of Commerce last week, Scotiabank was the first to miss analysts' expectations for quarterly earnings a share, falling short by one cent.

Scotiabank has been bulking up in its four key international markets: Mexico, Peru, Chile and Colombia. The bank bought a controlling stake in Chilean bank BBVA Chile for $2.9-billion, and made smaller acquisitions in Peru and Colombia, which have growth potential thanks to younger populations and a rising middle class. In the third quarter, international loan balances rose 10 per cent, and 14 per cent in the bank’s core Latin American markets.

“I think that the market has been hyper-focused on the U.S., which is fine, but sometimes they forget what’s going on in other parts of the world,” Mr. Porter said.

At the same time, BMO’s U.S. footprint delivered another impressive quarter, with U.S. profit rising 36 per cent compared with the same quarter a year ago. Benefits from U.S. tax cuts contributed 14 per cent of the unit’s earnings growth, and projected loan losses eased. But BMO also increased its commercial loan balances by 13 per cent at a time when most of its American peers have seen their respective growth in that category flatten.

“It’s [approximately] double the growth rate of our competitors in the U.S.” in commercial loans, said Tom Flynn, BMO’s chief financial officer, in an interview. “In the last year, we focused on expanding the number of industries that we specialize in, and that’s given us new markets to grow into. And we’ve also opened up some new offices in other parts of of the U.S.”

Over all, Scotiabank earned $1.9-billion, or $1.55 a share, in the third quarter, compared with $2.1-billion, or $1.66 a share a year ago.

The bank also absorbed $453-million in pretax costs – $320-million after tax – relating to a series of six deals totalling $7-billion that it has struck since last fall, some of which have yet to close. Adjusting to exclude one-time deal costs, Scotiabank earned $1.76 a share, just shy of the $1.77 consensus among analyst polled by Bloomberg LP.

Scotiabank also increased its quarterly dividend by three cents, to 85 cents a share. But its share price still fell 1.8 per cent to $76.89 on the Toronto Stock Exchange on Tuesday.

“We viewed [Scotiabank’s] performance as tepid,” National Bank Financial Inc. analyst Gabriel Dechaine said. “The big-picture perspective, though, revolves around the bank’s active M&A year.”

By contrast, BMO’s profit surged 11 per cent to $1.5-billion, or $2.31 a share, compared with $1.4-billion, or $2.05 a share, in the third quarter last year.

Adjusted for special items, BMO said it earned $2.36 a share, whereas analysts expected $2.26 a share, according to Bloomberg, and BMO’s share price inched 0.2 per cent higher.

Even amid a slowing mortgage market, profit from both banks' core Canadian banking operations continued on a path of steady growth over the past year, up 8 per cent to $1.1-billion at Scotiabank, and rising 5 per cent to $642-million at BMO.

And both lenders made strides in controlling costs, which is a high priority as they increase spending on digital initiatives. Scotiabank improved its efficiency ratio – which measures expenses as a percentage of revenue – to 52.5 per cent, from 53.3 per cent a year ago. And BMO, which has lagged its peers in this category, shaved its efficiency ratio to 61 per cent, from 63.1 per cent last year, with help from a $260-million restructuring charge recorded last quarter.

;

Why 2017′s Top TSX Stock Picker Says It’s Time to Avoid the Bank Sector

The Globe and Mail, Tim Shufelt, 7 August 2018

There are times when Canadian bank stocks trade more or less in unison, making it difficult to pick the winners from among the group. Last year was not one of those times.

With the oil market still trying to reconcile a global oversupply, the spring of 2017 saw the near-collapse of alternative mortgage lender Home Capital Group, bringing renewed scrutiny upon the Canadian housing market and, by extension, the banks.

“Those twin catalysts ended up creating an opportunity that frankly doesn’t always present itself in the banks,” said Robert Sedran, a bank analyst at CIBC World Markets.

Fast forward to now, and the analyst is waiting for the next jolt to the market to create some separation in the pack. “This isn’t the point of the cycle where we’d advise investors to jump into the sector aggressively,” he said.

Mr. Sedran’s keen timing earned him the distinction of being last year's top Canadian stock picker, as conferred by the Thomson Reuters StarMine Analyst Awards.

The awards rate sell-side equity analysts based on their investment recommendations for the companies they cover.

Each analyst's ratings are compiled to create a hypothetical portfolio. Performance is measured by the return that portfolio would have earned if an investor had followed the analyst's "buy" and "sell" recommendations.

Mr. Sedran’s picks would have generated an excess return of 16 per cent over the industry benchmark in the 2017 calendar year.

He credits most of that outperformance to calling the bottom on Canadian Western Bank.

In April, 2017, concerns about mortgage fraud among Home Capital’s network of brokers caused a run on the bank’s deposits and provided new fodder for Canadian housing bears.

“International investors were looking at the Canadian housing market and wondering if this was the match that finally lit the fuse. We felt strongly that it was not,” Mr. Sedran said.

One of the indirect casualties of the Home Capital debacle was Canadian Western, which was already being targeted for having considerable exposure to the energy sector. With Canadian Western shares down by 24 per cent over the previous six months, he slapped a buy on the stock in early June, 2017, just in time to catch a move upward in excess of 65 per cent over the next several months.

“A gain like that in a bank stock doesn’t happen very often,” Mr. Sedran said.

Canadian banks in general remain resilient to the slowdown in housing, which Mr. Sedran credits to the strength of the broader economy.

Though demand has fallen back as rates have risen and mortgage regulations have tightened, sellers are not generally motivated to accept lower prices as long as the economy is growing and unemployment is low.

“So there’s a decline in volume and perhaps the beginning of that fabled soft landing,” he said.

And though mortgage growth has slowed, the banks have enjoyed a built-in offset from rising rates, which help to improve profit margins.

“We think the profit trajectory for the banks is a pretty good one, at least until the next recession,” Mr. Sedran said.

The two names he expects to post above-average earnings growth over the next year are Toronto-Dominion Bank and Bank of Nova Scotia. Investing for superior earnings might be a better bet than looking for the group to benefit from multiple expansion, he said.

“We think we are late-cycle,” he said. “Now is the time to be a little bit more patient and cautious and wait for one of those dislocations.”

;

Banks are About More Than Just the Housing Market

The Globe and Mail, Andrew Willis, 29 July 2018

Canada’s housing market is something of a national obsession. It’s understandable. It’s also misguided when it comes to Canada’s banks.

It’s all very well for renters to dither about jumping in, or homeowners to fret about what their place will be worth after their kitchen reno. But along with being a tad tedious, all this talk is distracting investors from fundamental improvements in the fortunes of the big banks.

Canada’s big banks report quarterly financial results in August. Analysts are out with previews of the numbers that focus, predictably, on each institutions' exposure to the mortgage market. To sum up all this analysis in one line: No one sees residential real estate as a major concern.

CIBC World Markets Inc. ran something of a doomsday scenario, determining what would happen to profits if the banks suddenly stopped expanding their mortgage portfolios, which are perceived as a critical source of earnings. If growth in mortgage lending dried up completely, which is highly unlikely, CIBC analyst Robert Sedran determined the banks’ future profits would drop by just 1 per cent. “We view slowing mortgage growth as a very manageable headwind," Mr. Sedran said.

“It seems that whether we are late cycle or late-late cycle, the market is more preoccupied with what might go wrong in coming periods than what went right in the last one,” Mr. Sedran said. This backward-looking approach, he said, means investors miss out on the potential of new business initiatives under way at each of the big banks.

While the rest of us were trading stories about a friend of a friend who made millions flipping houses, the big banks rolled out international growth strategies that have nothing to do with Canadian housing. It’s worth noting that each bank is on a very different path.

Royal Bank made a big bet on wealth management in California. Bank of Nova Scotia did three more acquisitions in South America this year, adding to a massive regional platform. Canadian Imperial Bank of Commerce bought a Midwestern U.S. retail network, while Bank of Montreal expanded its U.S. commercial banking franchise.

In the past, results from these forays were overshadowed by strong performance from the banks' domestic businesses. That’s understandable, as even large acquisitions can take several years to make an impact on a bank’s profit. That’s about to change. Mr. Sedran said expansion strategies are starting to make a meaningful contribution to earnings growth, which in turn will boost stock prices.

Which bank has the best growth plan, and is poised to deliver the strongest results? That’s where things get interesting, as analysts can’t agree on who has winning strategy.

It’s likely one or two banks will outperform rivals owing to the success of their foreign investments. That’s a contrast to forces such as interest-rate moves or loan losses – the big waves that tend to wash across the entire sector. Potential gains on foreign investments are significant. Approximately 40 per cent of earnings growth at Bank of Montreal is expected to come from its U.S. expansion efforts, while Royal Bank’s wealth management platform is expected to account for 20 per cent of growth in profit, according to CIBC’s analysis. That means a bank with a successful strategy can break away from the pack.

Favourite picks from CIBC’s Mr. Sedran are Toronto-Dominion Bank, with a strong U.S. retail network that stands to benefit from tax cuts, and Scotiabank, for its South American exposure. Over at RBC Dominion Securities Inc., analyst Darko Mihelic favours Bank of Montreal, based on the potential of its U.S. commercial banking business.

In looking at growth strategies at banks and other public companies, analysts often highlight the potential for “multiple expansion.” It means that, over time, investors will put a higher value, or multiple, on each dollar of profit. In a recent report, Mr. Mihelic said, “BMO has a relatively smaller exposure to a potential slowdown in the Canadian economy and we see good upside as BMO may be the only stock with some multiple expansion potential.”

Canadians are going to keep speculating that a $1-million price tag on a run-down Toronto semi-detached with no parking is a sure sign of a real estate bubble. They may be right. But our obsession with housing shouldn’t distract from the potential for higher profits from the country’s banks.

;

Why Bank Investors Should Shudder with Each Rate Increase

The Globe and Mail, Ian McGugan, 11 July 2018

The Bank of Canada’s interest-rate decisions, often a rather humdrum affair, are becoming downright fascinating. The announcement on Wednesday of a hike, and the growing probability of more before year-end, suggest that the future will be very different than the past for Canadian banking stocks.

While the latest increase was widely expected, the tone of the announcement “was more hawkish than markets expected,” according to Derek Holt of Bank of Nova Scotia. He is counting on at least one more rate hike this year and would not be shocked to see two.

If this occurs, it would mark a significant turning point, both for the BoC and for the Canadian economy. Over the past quarter-century, and even more so over the past decade, Canadian households have borrowed with abandon as rates have generally headed lower.

Now that the economy appears to be running close to capacity, the central bank is faced with the difficult task of raising rates at a time when household debt burdens are massive by historical standards. Every upward tick in interest rates magnifies the burden of carrying all that borrowing. But the BoC appears increasingly confident that consumers can bear it.

Others have their doubts. The Parliamentary Budget Officer (PBO) warned in a report last year that “the financial vulnerability of the average Canadian household would rise to levels beyond historical experience” if rates climb as it expects over the next few years.

Some investors have their issues as well. In a report last month, Veritas Investment Research in Toronto said the pass-through of higher interest rates to highly indebted households will “drive higher delinquency rates and credit losses among Canada’s Big Six banks.”

The math behind these predictions is straightforward. It rests on the debt-service ratio (DSR), a measure of how much of a household’s disposable income goes to paying off loans, both in terms of principal and interest. The DSR was typically around 12 per cent in the 1990s and early 2000s. After the financial crisis, however, as rates tumbled and borrowing became more attractive, it jumped up to about 14 per cent.

What will happen if borrowing rates tick up by a percentage point over the next couple of years? Canadians owe an average of 168 per cent of their disposable incomes, so, all things being equal, a one-percentage-point bump in interest rates would result in a nearly 1.7-percentage-point increase in the DSR. This would leave the DSR close to 16 per cent, a level not seen in Canada before.

For its part, the PBO report predicts the DSR will hit 16.3 per cent by the end of 2021. To be sure, this ominous forecast could be disrupted if Canadians suddenly start vigorously paying off their debts or incomes jump upward. But whichever number you choose, the logic is clear: As more and more money goes to servicing existing debt at higher rates, less will be left for spending on everything else – or for servicing new debt.

For investors, this suggests Canadian bank stocks should be approached with caution. The Big Six and other lenders have thrived over the past quarter-century as households have more or less doubled their debt levels in relation to their disposable incomes. But if we’re entering a period in which loan growth will be slower, and default rates will rise, bank stocks look distinctly less shiny.

The housing market, too, is likely to feel headwinds. And there’s also the effect on the broad economy as the DSR grows. Veritas calculates that consumers are likely to see a significant slide in their spendable incomes as a result of higher borrowing costs. “We would expect these income effects to have materially negative implications for Canadian household discretionary spending and Canada’s overall economy,” it says.

To be sure, the BoC is aware of all these issues. Governor Stephen Poloz gave a speech in May in which he examined the issue and expressed confidence the central bank can manage the risks. Other countries, such as Norway and Australia, have even higher levels of debt in relation to incomes, he pointed out.

The central bank continued its confident tone on Wednesday, arguing that higher oil prices offset increased trade tensions and that the housing market is stabilizing nicely. So everything is good? Perhaps. But investors counting on a continuation of bank stocks’ endless good fortune may want to temper their expectations.

;

The Next, Crucial Battle in Wealth Management: Banks’ Concentration of Power

The Globe and Mail, Tim Kiladze, 10 July 2018

Six years ago, Canada’s securities regulators stunned Bay Street by launching a review of mutual fund fees. Justifying the probe, they cited research showing these fees are “among the highest in the world” and noted that many advisers do not tell their clients about these costs.

In late June, after multiple rounds of consultations, the watchdogs finally released their recommendations. They landed with a splat.

After so many years of study, the only major proposal was a ban on deferred sales changes. Trailer fees − controversial, annual charges paid by investors to financial advisers, for simply investing in mutual funds − live on.

The verdict is a blow to investors. These annual fees often consume 1 per cent of assets invested in a fund, and they serve as a steep tax on them.

Although the study now feels complete, it shouldn’t be the end. There are still other avenues for regulators to pursue. At the top of that list: the increasing concentration of power in wealth management among the Big Six banks.

Historically, Canada’s banks were second-rate players in this corner of the financial-services industry. Wealth management used to be dominated by non-bank fund managers such as AGF Management and Mackenzie Financial and independent brokerages such as Nesbitt Burns and Wood Gundy.

Methodically, the banks bought and built their way into a dominant position over a few decades, first by scooping up full-service adviser networks in the 1980s and 1990s, then by turning their attention to asset managers such as Phillips Hager & North (acquired by Royal Bank of Canada in 2008) and DundeeWealth (bought by Bank of Nova Scotia in 2011). Toronto-Dominion Bank’s plans to purchase Regina-based Greystone Managed Investments Inc. for $792-million in cash and stock is a continuation of that trend.

The Big Six now account for almost half of long-term mutual fund assets − a proportion that continues to grow − as well as 53 per cent of net mutual fund sales so far this year, according to Strategic Insight, a consultancy that studies the asset management industry.

Has the banks’ newfound power and scale resulted in a better deal for investors? Hardly. The Globe and Mail recently studied the 100 largest mutual funds in Canada, a list dominated by the banks, and found their fees have barely dropped over the last five years. The average decline in management expense ratios (MERs) for the 100 largest funds was just 0.05 of a percentage point, and the average MER is still 1.99 per cent.

About half of those funds are managed by banks. At the top of the list were two RBC fund portfolios that, incredibly, held a combined $55-billion in assets as of Dec. 31. As these megafunds have grown, their expense ratios have not dropped at all, The Globe’s examination found.

A few independents, such as CI Financial Corp., maintain the heft, sales force and name recognition to compete with the big banks in asset management. But overall, independent firms’ ability to provide honest competition is weaker than it was, which makes it harder for startups with lower fees, such as Wealthsimple, or sometimes even global giants with low-cost funds to attract investors dollars.

The banks have such size that they can use their massive networks of bank branches and financial advisers to promote their own funds – and squeeze out rivals in the process.

“Being an independent in investment management isn’t easy,” said John Ewing, chief investment officer at Ewing Morris & Co, an independent asset manager. “The Canadian banks have a lot of different ways to influence investors.”

Sometimes, they take it too far. When asked about the issue of banks selling their own proprietary funds in 2013, Dave Agnew, head of Canadian wealth management at RBC, told The Globe: “We do not force any product, whether it’s in-house or not … to the clients within our wealth businesses in Canada.” This claim now has an asterisk on it. In June, the Ontario Securities Commission fined RBC $1.1-million for paying some of its advisers a better commission to sell the bank’s own funds between 2011 and 2016.

RBC says Mr. Agnew’s comment was not misleading. Non-RBC funds are still sold within the bank’s system. But while the bank may not “force” a fund on its customers, it was caught offering some employees 10 basis points more in commissions to sell in-house funds. Over five years, the OSC found that the enhanced compensation added up to $24.5-million.

“Money talks,” said John O’Connell, who runs independent asset manager Davis Rea Investment Counsel and was formerly a top financial adviser at RBC Dominion Securities. And the banks know it, he argues. “They have always used compensation as a behaviour control.”

This matters more than ever. Despite all the hype around low-cost, exchange-traded funds, mutual funds are still a big deal in Canada – they account for 36 per cent of the country’s $4.5-trillion in financial wealth, more than bank deposits. And the banks are becoming ever more powerful in this market, as they continue to scoop up competitors. Bank of Nova Scotia has been particularly acquisitive lately, buying Jarislowsky Fraser Ltd. for nearly $1-billion and MD Financial for $2.6-billion this year – two respected independents.

This consolidation is playing out against a new backdrop. For many years, banks have benefitted from a lending boom spurred by ultra-low interest rates. That phase is coming to an end. The lenders now refer to the “decade of wealth,” noting that baby boomers will be retiring in waves and they will need help with investments, which should drive growth.

Independent financial-advisory firms still have the highest number of advisers – about 30,000 of them. However, this segment of the market usually has clients with much smaller account sizes, according to Strategic Insight.

The banks, meanwhile, now have roughly 10,000 advisers located in their branches, who mostly sell mutual funds to the “mass affluent” market, or clients with, say, $50,000 to $250,000 in investable assets. Within the branches, banks can try to cross-sell funds to their banking clients, and credit cards and mortgages to their wealth-management clients. Facebook, some others – wield immense power. But abusing that scale, to the detriment of investors, should never be allowed to fly.

;

Rising Rates Add to the Allure of Bank Stocks

The Globe and Mail, David Berman, 22 January 2018

Canadian big bank stocks have continued to rise since the Bank of Canada raised its key interest rate on Wednesday, highlighting a nice safety feature for dividend-loving investors: Bank stocks can actually benefit from rising rates.

This is becoming an important feature in today's market, when some dividend stocks are struggling.

As rates rise, bond yields are also moving higher. The yield on the 10-year Government of Canada bond is now above 2.2 per cent, moving toward a four-year high and up from about 1.8 per cent just one month ago.

Rising bond yields offer competition to dividends and are dragging on stock valuations in some rate-sensitive sectors. Utilities, real estate investment trusts and telecom stocks have been looking particularly vulnerable over the past six weeks: BCE Inc. is down more than 7 per cent, RioCan Real Estate Investment Trust is down about 5 per cent and Fortis Inc. is down 9 per cent.

But Canada's big banks have been immune to this trend. The sector hit record highs on Monday, and is up 3.7 per cent over the past six weeks, suggesting that investors believe these dividend-paying stocks remain compelling investments when interest rates are rising.

The reason? Higher rates tend to coincide with a stronger economy, which means more bank loans, low loan losses and increased capital markets activity – all of which drive bank profits and feed into dividend increases. Higher rates can also drive fatter margins on loans, providing a tailwind to the banks' lending activities.

In other words, if bank stocks were attractive dividend gushers when interest rates were very low, they look even better as rates start to rise – as long as these increases don't raise alarms about the ability of consumers to service their debts.

So if the big banks look like ideal dividend stocks in the current interest rate environment, which particular bank stocks should investors consider?

It's worth repeating that one compelling strategy for choosing the best overall bank stock is to simply buy last year's underperformer: Canada's biggest banks have an uncanny ability to narrow the performance gap very quickly, turning laggards into outperformers. Given that Bank of Montreal lagged in 2017, it stands a good chance of leading in 2018.

But whatever your stock-picking strategy, bank dividends are hard to ignore, especially when so many other dividend-paying stocks are struggling.

Based on straight-up dividend yield, Canadian Imperial Bank of Commerce stands well above its Big Six peers with a yield of nearly 4.3 per cent. The average yield for the other five banks is about 3.6 per cent.

However, dividend increases are another important consideration. All of the big banks have been hiking their quarterly payouts at a brisk pace, but the increases have varied by bank.

In 2017, Royal Bank of Canada and Toronto-Dominion Bank led the way by hiking their respective dividends by 9 per cent each. CIBC trailed with an increase of 6 per cent.

The longer track record reveals a similar trend. According to data from RBC Dominion Securities, RBC hiked its dividend by an average of 11 per cent per year between 2000 and 2017, for a total increase of 574 per cent. CIBC trailed the frontrunner with a total increase of 333 per cent over this 18-year period.

The takeaway: Buying a bank stock with the biggest dividend yield today might not give you the best payout over time if other banks are raising their dividends more aggressively. Indeed, though RBC trails most of its peers with a current dividend yield of 3.4 per cent, history suggests it is the dividend king over time.

And what does the immediate future look like? One way to predict near-term bank generosity is to look at their payout ratios, which compare dividend payouts with profits.

In recent years, the big banks have tended to pay out, on average, 45 per cent of their profits in the form of dividends (again, according to a report from RBC Dominion Securities). In 2017, RBC, CIBC and Bank of Nova Scotia had above-average payout ratios of 46 per cent each, while TD had a payout ratio of just 42 per cent.

The lower payout ratio suggests TD might have more room to raise its dividend than other banks. But investors can expect hikes from all the banks, ensuring that the sector will continue to be a dividend powerhouse.

;

US Tax Overhaul is a Present for Big Canadian Banks

The Globe and Mail, James Bradshaw, 22 December 2017

By overhauling corporate taxes, American legislators have delivered a gift to some of Canada's largest banks that's potentially worth hundreds of millions of dollars a year in added profits.

The sweeping tax cuts hastily passed by the U.S. House of Representatives and Senate and signed into law by U.S. President Donald Trump on Friday are expected to boost earnings per share at four of Canada's largest lenders by 1 per cent to 3 per cent, according to a report by analysts at Citigroup Global Markets Inc.

Bank of Montreal stands to benefit the most: With its extensive banking network in the American Midwest, it is estimated to receive a 2.6-per-cent lift to earnings per share. At Toronto-Dominion Bank, with its network of more than 1,200 branches stretching the length of the U.S. East Coast, EPS is projected to rise by 2.3 per cent. Royal Bank of Canada and Canadian Imperial Bank of Commerce, which have both acquired banks focused in private banking and commercial lending to build out their U.S. presence in recent years, can expect increases of 1.6 per cent and 0.9 per cent respectively, according to Citigroup.

Spokespeople for BMO, CIBC, RBC and TD declined to comment for this story.

That's a welcome tailwind, but also a far cry from the boon expected for the largest U.S. banks, which will see EPS climb by anywhere from 8 per cent to 17 per cent. That's largely because they do the lion's share of their business in the United States, but also due to other benefits – such as lower repatriation rates for cash held abroad – that won't provide a measurable boost to Canadian-owned banks.

The most significant change in the new bill drops the marginal corporate tax rate from 35 per cent to 21 per cent. But there are also accounting considerations in the fine print that could limit the short-term benefits of the tax breaks for some banks, including adjustments to the Base Erosion Anti-Abuse Tax (BEAT), which limits certain tax-deductible payments made to foreign affiliates.

In annual filings, BMO disclosed that the changes would require the bank to reduce its net deferred tax asset – an accounting measure tied to the timing between a bank booking a tax loss and realizing its benefit – by roughly $400-million (U.S.). And that "would result in a one-time corresponding tax charge in our net income," the bank said, which would then be offset over time by higher earnings.

Capital levels that regulators track closely could also temporarily inch lower. Using an estimated 20 per cent corporate tax rate – which is slightly lower than the actual 21-per-cent rate – BMO estimated its common equity tier 1 (CET1) ratio could fall by about 15 basis points (100 basis points equal one percentage point). But BMO has a more than ample buffer: As of Oct. 31, its CET1 ratio was a robust 11.4 per cent.

"There could be a hit to tangible book [value], and a much smaller one to regulatory capital, from the write-off of [deferred tax assets]," said the Citigroup analysts.

Of the four major Canadian banks that stand to benefit the most, TD reaps the largest share of its total profit from U.S. operations, at 29 per cent, according to the report.

;

Darryl White — New BMO CEO

The Globe and Mail, James Bradshaw, 1 November 2017

Darryl White is not sure what is ailing his beloved but slumping Montreal Canadiens. "It's confidence, right? It's got to be confidence," he ventures.

Mr. White officially starts as Bank of Montreal's new chief executive officer on Wednesday, and also happens to serve as a director of the storied hockey club. At 46, with close-cropped brown hair, he is youthful, trim and small in stature. But he radiates confidence.

Striding past the polished marble columns and century-old teller windows in BMO's historic Montreal main branch to sit for an interview days before taking over as CEO, Mr. White seems to embody a new generation of bankers tasked with leading Canada's oldest bank into its third century in business – and determined to push ahead at a faster pace.

His ambition at the outset is not to change the bank's fundamental course. Board chairman Robert Prichard said Mr. White's priority will be keeping "continuity of strategy and continuing acceleration of performance." That means driving faster growth – particularly in BMO's U.S. operations – by boosting spending on technology and "actually thinking like a customer," Mr. White said.

"I think we've been doing a pretty good job of it," he said. "I think we can do a better job as we go forward."

Yet, squeezing more performance out of an established bank that ranks as Canada's fourth-largest will be no simple task. BMO's share price has hovered around the $100 mark of late, but has gained only 2.3 per cent year-to-date – which trails all of its Canadian peers. The bank's return on equity, watched closely by shareholders, stood at a healthy but unspectacular 13.4 per cent at the end of its most recent fiscal quarter.

And red flags are on the horizon.

Uncertainty about the fraught renegotiation of the North American free-trade agreement (NAFTA) could spell particular trouble for BMO, which calls itself Canada's largest trade bank. At the same time, there are continuing concerns about Canadians' high consumer-debt load and soaring urban-housing prices, as interest rates begin to rise from historical lows. And new technologies are threatening to upend banking conventions, forcing financial institutions everywhere to adapt quickly.

Unlike departing CEO Bill Downe, who stepped into the job in early 2007 and quickly faced a global financial meltdown, Mr. White inherits BMO on a stronger footing, with a more optimistic economic outlook. On Mr. Downe's watch, total assets roughly doubled to $709-billion, while its U.S. footprint through the BMO Harris Bank subsidiary, which will be crucial to its growth prospects, expanded to serve more than two million personal and commercial customers with 600 branches across the U.S. Midwest.

BMO has similarly lofty expectations for Mr. White, a father of three who has worked at the bank for half his life. For the lion's share of that tenure, he was an investment banker in its capital-markets arms, known for giving sharp strategic advice to blue-chip companies and for his deep devotion to his roster of clients.

But last year, as his name rose to the top of the bank's succession chart, Mr. White took on much broader duties as chief operating officer. That gave him global responsibilities spanning retail and commercial banking, wealth management, marketing and even technology. As he delved deeper into corridors of BMO that were less familiar to him, he discovered a willingness to adapt embedded in the bank's culture that fuels his confidence in its prospects.

"I don't want the culture to change," he said. "And if there's a change, it's perhaps at a pace that's taking advantage of the foundation that we've built – so a pivot from foundational investments to acceleration."

Made in Montreal

As he prepared to lead BMO into the future, Mr. White took a step back into the bank's past on Sunday, revisiting the city that raised him.

More than 100 current and former executives, board members and their families assembled in Montreal. It was a rare gathering of multiple generations of the bank's most senior leaders: Mr. White and Mr. Downe, as well as previous CEOs Tony Comper and Matthew Barrett; Mr. Prichard, the current chairman; and past chairman David Galloway; plus an array of financial-sector heavy hitters, including Bank of Canada governor Stephen Poloz.

They came together for a ceremony unveiling a stone tablet in the foyer of the bank's historic and opulent Montreal main branch, first built in 1847 and expanded in the early 1900s. The setting and timing were carefully chosen for their symbolism, as a culmination of a year-long celebration of the bank's 200th anniversary, which arrives on Friday.

Under the branch's ceilings adorned with gold leaf, the tablet now bears brass lettering spelling out 66 names – Mr. White's among them – of the bank's foremost leaders through its most recent century, steps from a similar memorial erected in 1917. "Our chief financial officer is quite happy to know we don't build [branches] this way any more," Mr. Downe joked in a speech at the ceremony, before guests decamped upstairs to toast the retiring CEO's career over a dinner of mustard-crusted rack of lamb and caramelized black cod.

Mr. White's own roots in Montreal are more modest. He grew up in a middle class, West Island home five minutes from the city's largest airport, before studying business at the University of Western Ontario and Harvard Business School.

Beginning at the bank with a gruelling apprenticeship with Nesbitt Thomson (now BMO Nesbitt Burns Inc.), he charged through BMO's ranks. And eventually, in 2006, he returned to Montreal for a five-year homecoming that proved an important testing ground, where he caught the attention of senior executives.

Jacques Ménard, the current president of BMO in Quebec, was one of Mr. White's mentors during his time in Montreal. "He made me look good every day," Mr. Ménard said, but he eventually advised BMO's leadership "to get him out of here" and see what he was capable of.

Mr. White moved to Toronto in 2011, but has kept close ties in Montreal. He keeps a summer home in Quebec, and pledged to maintain a regular presence in Montreal, which "will continue to be the heartbeat of the company."

Day one and beyond

Mr. White's first day as CEO, Nov. 1, will begin with client meetings and end with parent-teacher interviews at his children's school.

In the intervening hours, he will fit in visits to two Toronto branches, to the bank's computing centre in Scarborough to see its chief technology officer and to an off-site gathering on inclusion and diversity at the BMO Institute for Learning – which he calls "BMO University."

The day marks a milestone for the bank, but Mr. White's agenda is fairly typical of his own education over the past year. As COO, he has spent much of his time getting an immersion course in BMO's diverse business lines, making countless branch visits, joining the phone lines at call centres and meeting an array of customers.

"For me, that's been an extraordinarily valuable experience to cut across all of our businesses," he said, and it has also made him more attuned to what's happening outside the bank.

One of Mr. White's early plans to hedge against uncertainty is to boost BMO's spending on technology. He declined to attach dollar figures to the existing budget or the increase he has in mind, but pledged that the bank will stay disciplined about digital investments. "A strategy whereby one splashes capital at technology because it's a trendy thing to talk about falls short," he said.
In the United States, Mr. White expects to quicken the rise of BMO Harris as a share of the bank's overall earnings. Like many of its Canadian peers, BMO has looked to the hard-fought U.S. banking market for an opportunity to grow faster than the mature Canadian market will allow.

Over the past six years, the bank's U.S. arm has grown at a compound annual rate of 24 per cent and now contributes about a quarter of the bank's income, with 70 per cent of that coming from personal and commercial banking, nearly 25 per cent from capital markets and the remainder from wealth management.

"That's the earnings growth story in the U.S., and that'll continue to be the case," he said.

He is bullish on the prospects for U.S. tax reform, and sees room to grab market share. Within five years, he predicts the U.S. arm's overall contribution to earnings may be "approaching a third" on the strength of its existing assets. "In order for it to be much greater than that, you'd have to look at growing by acquisition," he said.

But Mr. White concedes that the prospect of a breakdown in NAFTA talks as Canada, the United States and Mexico struggle to make headway in negotiations could put the brakes on trade flows that are vital to BMO's cross-border business.

"NAFTA's important. If NAFTA goes away, would we see a slowdown in economic trade? Yes. How much? I don't know," he says, noting that 32 U.S. states count Canada as their biggest export market. "Is it an impact that we're going to worry about unduly from the perspective of our delivery to our customers and our shareholders? No. We're going to continue to serve those customers in the markets that we have under the regimes that will exist."

The bank has also been adapting to a new reality for credit in Canada, as federal measures have been rolled out to tax foreign home buyers and require tougher stress testing on mortgages, just as interest rates have begun to climb. Mr. White reiterated that "we've been supportive of those" new regulations.

But he also believes "credit, writ large, is well managed," and that the banking system, both in Canada and globally, is more sturdy than it was a decade ago.

"There's always going to be risk in a system," he said. "We've taken that risk throughout history, we have it today. But I think it's in a reasonable place on the curve."

;