Perhaps no market sector is in need of reform as much as the banking sector, reports Brian Dally....
Two Ways to Bank on Canada
11/27/2019 5:00 am EST
Gavin Graham is a specialist in international securities and has held senior positions in financial organizations in London, Hong Kong, and Toronto. Here, the contributing editor to Internet Wealth Builder reviews two recommendations among Canadian banks.
RBC Group (RY) is Canada's largest bank with more than 16 million customers in 34 countries and 86,000 employees. It continues to benefit from its leading positions in mortgages and commercial lending, as well as running the leading investment bank.
Its wealth management division has expanded in the U.S. through its acquisition of Los Angeles-based City National Bank. In Canada, RBC recently entered into a joint venture with market leader BlackRock (BLK), owner of iShares, which offers exchange-traded funds.
Since being recommended four year ago, it's up by one-third. The dividend has been raised every few quarters. Net income for the third quarter (to July 31) was up 5% to $3.3 billion ($2.22 per share, up 6% on that basis).
The improvement was driven by strong growth in Personal and Commercial Banking (PCB), Wealth Management, and Insurance, offset by lower earnings in Capital Markets and Investor and Treasury Services.
CET1 capital ratio under Basel III rules was 11.9%, up 0.8% from last year, while return on equity (ROE) was down moderately (0.6%) at 16.7%.
The quarterly dividend was raised by $0.03 to $1.05 ($4.20 per year), giving RBC a yield of 3.86%. RBC remains a buy for its strong capital base, market leading positions in personal and commercial lending, and its expanding wealth management division.
Bank of Nova Scotia (BNS) — known as Scotiabank — is the third largest Canadian bank and has the largest international exposure of any of the chartered banks.
Over one-third of its earnings are derived from the four Pacific Alliance countries in Latin America: Mexico, Colombia, Peru, and Chile, as well as the Caribbean and Asia Pacific. Its recent acquisitions of asset managers Jarislowsky Fraser and MD Financial have given it some $240 billion in AUM.
The stock is up $5 (7%) over the last year but has lagged the bank index over the last five years, up only 11%. This is partially due to the negative sentiment towards emerging markets.
Net earnings for the third quarter (to July 31) on a reported basis were flat at $1.98 billion versus $1.94 billion. Earnings per share were down 3.2% to $1.50. However, on an adjusted basis after allowing for acquisition and divestment charges, net income increased 9% to $2.45 billion and EPS rose 6.8% to $1.88.
Canadian banking net income was up 1% to $1.16 billion, helped by moderate growth in loan volumes and margins while the previous year benefited from special gains on the reorganization of Interac and the Insurance operations.
International banking saw growth in net income of 50% to $781 million. Adjusted for acquisition related costs, income rose 14% to $815 million.
The quarterly dividend was increased $0.03 (3.4%) to $0.90 ($3.60 annually). It is 6% higher than a year ago, giving Scotiabank a yield of 4.74%. Scotiabank remains a buy for its strength in commercial lending and wealth management, as well as its exposure to faster growing and higher margin international markets.
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