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Canadian banking industry analysis

Google analytics

Comparing the popularity of the google searches, using the insights query found [here](https://trends.google.com/trends/explore?date=all&q=scotiabank,bmo,td,rbc,cibc), it is clear that TD is most searched for. The focus of this research will be the Canadian markets, but it is important to consider the distribution of searches worldwide. In Mexico, there is a heavy concentration of searches for Scotiabank. In the US, TD dominates searches, as well as in the UK. RBC and TD are both around 45% of searches in India. There is an extreme concentration of searches for Scotiabank in Peru, and it is the only instance where there are more searches than in Canada for all 5 banks. Overall, the relative distribution over 14 years is this:

Fig.1

|Bank|Average Interest over time, google searches (Index)|
|:-|:-|
|TD|79|
|RBC|36|
|Scotiabank|24|
|CIBC|21|
|BMO|20|

​

This doesn’t tell us much other than that TD is likely present in the US at some scale, as well as Scotiabank in Peru.

Most data from Finviz, specifically from this query: [finviz.com](https://finviz.com/screener.ashx?v=111&f=cap_largeover,fa_pfcf_u5,geo_canada,ind_banksdiversified&ft=4)

All five banks have managed to keep their Price/FCF below five, even during the post Covid bubble. This forces a deeper analysis to be carried out. Amazingly, all of their P/E ratios fall between 12 and 15. The figure below corresponds to these values.

Fig 2.

​

|Bank|P/E|Price/FCF|
|:-|:-|:-|
|TD|12.66|0.59|
|RBC|14.59|1.18|
|Scotiabank|14.50|2.31|
|CIBC|13.65|1|
|BMO|13.99|1.28|
|Average|13.878|1.272|

Now a difference between a P/E or P/FCF of 2 is not grounds for elimination from consideration for almost any cases. However, it should be noted that TD appears to be the most favorable from these preliminary figures.

The next three values to be analyzed relate to earnings and sales. Here, we start to see some differences between the banks, with TD managing to grow earnings significantly more than the other banks in the past 5 years.

Fig 3.

|Bank|P/S|EPS growth last 5y|Sales growth past 5y|
|:-|:-|:-|:-|
|Scotiabank|3.36|-1.30%|7.9%|
|RBC|5.22|3.1%|8.9%|
|BMO|4.46|2.8%|12.1%|
|CIBC|3.43|-1.5%|8.8%|
|TD|4.58|8.8%|7.5%|
|Average|4.21|2.38%|9.04%|

​

TD is a clear winner in this section. It would be ideal to bring the P/S down, but because the P/FCF is so high for all of the banks, it is not a worry. TD is the only bank managing to become more efficient as they scale, which potentially shows an effective management team, or increasingly more profitable businesses, or both. It is possible that the earnings increase may be a result of a lack of attention to other obligations or competitive endeavors, which could possibly hurt them in the future. CIBC and Scotiabank have managed to decrease earnings as they have increased sales, possibly hinting at ineffective management, or defective operations. It is also possible that the lower earnings are a result of restructuring, which could be positive in the future. All of these values will have to be analyzed much closer.

The analyst does suggest that a new measure be conceived to gauge growth sustainability. The value would be determined by dividing EPS growth over a period, x, over Sales growth, over that same period, x. The measure could be called the income growth sustainability measure, and is formatted as follows:

IGSM = EPS growth in the past x / Sales growth in the past x years

Where at least one value must be positive for the calculation to be effective. The value produced is unitless The ideal value is 1, and deviations outside the range of 0.5 and1.5 are to be considered unsustainable. This value is only rough estimate, and would have to be refactored t in order to be used commercially because it produces inaccurate values the further you stray from 1 (a value of 2 is clearly unsustainably, as well as a value of-1 with positive earnings). Using the newly constructed equation, the figure below can be constructed.

Fig 4.

​

|Bank|IGSM|
|:-|:-|
|TD|1.17|
|RBC|0.34|
|Scotiabank|0.16|
|CIBC|-0.17|
|BMO|0.23|

Again, TD clearly has the most sustainable growth. An average is not computed here because of the nature of this value, and it will not be used to determine any conclusions. A better evaluation of sustainable growth must be formulated.

No securities analysis is complete without analyzing the balance sheet. All of the companies have a P/Cash ratio between 0.23-0.25, so those values do not need to be discussed on a relative basis. Current ratios, D/E measures, and P/B are considered in the following figure. Some of this information has to be sourced from [SEDAR](http://www.sedar.com/). Just press “ctrl f” and type in “annual” to get to the reports. Other data is from [Macrotrends](https://www.macrotrends.net/), probably the best source of long term information on the internet.

Fig 5.

|Bank|Current ratio|Debt to equity|Price to book|
|:-|:-|:-|:-|
|TD|0.93|0.13|1.68|
|RBC|0.90|0.11|2.02|
|Scotiabank|1.05|0.41|1.49|
|CIBC|1.03|0.12|1.46|
|BMO|0.98|0.14|1.42|
|Average|0.98|0.182|1.614|

All of the values, except for RBCs P/B and Scotiabanks debt to equity fall within range of their peers. Objectively, these values are ridiculously strong, but nonetheless, we are looking for a winner among winners.

The last rudimentary fundamentals to be considered are some alternative financial ratios that work best when relatively compared. This is the largest section. We will be looking at all of the ROx’s, as well as PM and OM.

Fig 6.

|Bank|ROE|ROI|ROA|Operating Margin|Profit margin|
:–|:–|:–|:–|:–|:–|
|TD|13.50%|5.20%|0.70%|56.90%|36.30%|
|RBC|14.30%|4.00%|0.70%|60.00%|36.10%|
|Scotiabank|10.40%|17.30%|0.60%|51.20%|23.50%|
|CIBC|10.90%|16.00%|0.50%|54.30%|25.40%|
|BMO|10.30%|5.40%|0.50%|59.10%|24.20%|
|Average|11.88%|9.58%|0.6%|56.3%|29.10%|

For the returns, Scotiabank and CIBC slightly ahead of the other three because of their exceptionally high ROI. For operating margins, RBC and BMO are slightly above average, where Scotiabank is lagging behind. TD and RBC have exceptionally higher profit margins.

Culminating the rudimentary analysis is a large comparison of Figures 2-6, excluding 4. For each figure, a “winner” can be determined, and a “loser” can be determined. Here are the overall rankings for each figure.

For figure 2, TD is the most attractive in both fields. CIBC is the second most attractive for both fields. The first two fall below the average P/E, but because of the limited deviation between banks, this is not a huge accomplishment. The next two rankings are subjective. BMO and RBC are tied for third. Their percent difference between PEs and P/FCFs are quite similar for both of them, and each value carries similar importance. Scotiabank is fourth

In figure three, TD is again the winner. Their sustainable growth is extremely attractive, despite having a higher P/S than the average. BMO is second for the same reasons, and RBC is third because of their high P/S. Scotiabank and CIBC are tied for fourth because they both have similar P/S ratios and their Sales growth to eps growth are similar.

For figure 5, CIBC is the slight winner. Most values are very similar, but CIBC is in the top two for all categories. Second is BMO, lagging slightly behind CIBC with their CR and D/E, but winning the P/B category. Third is TD. Fourth is RBC because of their higher than average P/B. Last is scotiabank with the highest D/E ratio despite having stronger values in other fields. Scotiabank is in last because this value is almost four times the next highest D/E, whereas the highest P/B is only ~25% greater than the best P/B ratio.

In judging figure 6, a higher priority is placed on profit margin. Giving equal weighting to ROE, ROI and ROA, TD is the winner of figure 6. RBC is very close behind. CIBC is third, and Scotiabank is fourth. BMO is last.

Fig 7. The results of the preliminary relative analysis

|Bank|Figure 2 ranking|Fig 3 ranking|Fig 5 ranking|Fig 6 ranking|Overall|
|:-|:-|:-|:-|:-|:-|
|TD|1|1|3|1|1|
|RBC|=3|3|4|2|3|
|Scotiabank|4|=4|5|4|5|
|CIBC|2|=4|1|3|2|
|BMO|=3|2|2|5|4|

Clearly, TD was the most attractive followed by CIBC.

Market analysis. Data is mostly from [stockhouse](https://stockhouse.com/).

This section will analyze more sensitive factors of each company, such as short position, large and insider transactions, volatility, and other factors related to the current situation of the company. It will be split into individual sections for each bank, as well as a composite section comparing some factors.

Lets begin with TD. TD has a market cap of 150 billion, which is quite large for even american companies. Their beta is 0.9, which will hopefully draw speculation away. They have a dividend yield of 3.825%. Not a lot of insider information is available, but most insiders have historically bought below 60 and sold at 70. The current price is 65, but is extremely attractive.

|Bank|Market cap|Beta|Yield|Short interest|Sales|Assets|
|:-|:-|:-|:-|:-|:-|:-|
|TD|150.24b|0.9|3.825%|0.33%|43b|1.7t|

BMO has a market cap of 74 billion, just about half that of TD. They have a beta of 1.17, which is higher than desired. They have a yield of 3.71% and a short interest of 0.59%. Their yield is slightly lower than TD, despite having the higher beta. Recent insider purchases have been below $90, and a number of sales have happened above 100.

|Bank|Market cap|Beta|Yield|Short interest|Sales|Assets|
|:-|:-|:-|:-|:-|:-|:-|
|BMO|74b|1.17|3.71|0.59%|25b|0.95t|

CIBC has a market cap of 59 billion. Their beta is 1, and their yield is 3.34. Short interest is 0.98%. There have been a number of insider sales above 100, and insider purchases below this number.

|Bank|Market cap|Beta|Yield|Short interest|Sales|Assets|
|:-|:-|:-|:-|:-|:-|:-|
|CIBC|59b|1|3.34|0.98%|18b|0.73t|

RBC has a market cap of 134 billion. Their beta is 0.79, which makes them quite attractive if considering their dividend. Their yield is 3.34. Short interest is 0.34%. The buy/sell line is at around 80 for insiders.

|Bank|Market cap|Beta|Yield|Short interest|Sales|Assets|
|:-|:-|:-|:-|:-|:-|:-|
|RBC|134b|0.79|3.64|0.34%|47b|1.62t|

Overall

|Bank|Market cap|Beta|Yield|Short interest|Sales|Assets|Overall|
:–|:–|:–|:–|:–|:–|:–|:–|
|TD|150.24b|0.9|3.825%|0.33%|43b|1.7t|3|
|BMO|74b|1.17|3.71%|0.59%|25b|0.95t|5|
|Scotiabank|74b|0.85|4.64%|0.34%|31b|1.14t|1|
|RBC|134b|0.79|3.64%|0.34%|47b|1.62t|2|
|CIBC|59b|1|3.34%|0.98%|18b|0.73t|4|
|Average|98b|0.942|3.83|0.516|32.8b|1.23t||

Scotiabank has a market cap of 74 billion. Their beta is 0.79, which makes them quite attractive if considering their dividend. Their yield is 3.34. Short interest is 0.34%. Scotiabanks buy/sell line is around 75 with a lot of deviation.

​

​

All five institutions have some attractive things and some ugly things in this table, relatively speaking. Scotiabank’s yield is offset by the low ranking it got in the previous relative analysis. TD has the most attractive yield other than that, and the low short interest is reassuring. RBCs low beta is very attractive, as well as their large sales and massive asset pool. They are the second most attractive entry in the table after Scotiabank. TD is third at a relatively neutral position. CIBC is fourth and BMO is fifth because of BMOs large beta.

Legal, regulatory, and other news releases, various sources.

TD:

* Making acquisitions.
* No recent regulatory information
* No recent legal news

BMO:

* Recently sold asset management business
* No regulatory
* No legal

RBC:

* No recent news
* No recent legal
* No recent regulatory

Scotiabank:

* Recently released an unpopular compensation plan for executives
* Recently announced the gradual allocation of 10b for funding CMHC initiatives
* No recent legal
* No recent regulatory

CIBC:

* Recently issued 1b of debentures.
* No recent legal
* No recent regulatory

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8 Comments

  1. I cover all these banks. You should focus on the drivers of their revenue. They are banks. You don’t analyze a bank like you do with normal companies. Focus on their loan books, Canadian sovereign curve, commission income, bad loans, liquidity, government policy, economics.

  2. Canadian banks are fucked. There’s the biggest housing bubble of all time happening in Canada. It’s 2008 all over again, but with a public insurer and BoC added in as players. Their risk is entirely dependent on the amount of mortgage debt they haven’t offloaded to the taxpayer yet.

  3. Did you look at BNS? I have a 64% gain on BNS after a year on a 401k. Not bad. It’s comparable to TD’s performance, but BMO fared way better in the same time frame.

  4. love this analysis, I own all the banks, going to double down on Scotia. Sometimes the eye test tells a lot too. look at the chart, BNS hasn’t even hit it’s 2017 highs.

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