Canadian Banking Buys

10/05/2016 7:00 am EST

Focus: GLOBAL

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Insiders Plus, favors quality stocks offering both growth and income potential for long-term investors. Here, he reviews two of his holdings — both Canadian bank stocks.

Our Canadian banks reported their third quarter results recently. Both did well.

Canadian Imperial Bank of Commerce (CM) reported diluted earnings per share (EPS) of $3.61, up 49.2% compared to $2.42 for the third quarter a year ago.

However, there were several asset sales and other restructuring items that affected the results, so here the adjusted figures tell the true tale. They were still good at $2.67 per share, up 9% from last year's $2.45.

Reported return on common shareholders' equity (ROE) was 26.8% and adjusted ROE was an excellent 19.8%. At 57.8%, the adjusted efficiency ratio is still on the high side of good.

Lower is better. And yes, it's a weirdly named ratio, but this seems to be occur often with Canadian banks. I don't know why, but as long as they keep growing earnings and paying solid dividends, I won't lose any sleep over it.

The company declared a dividend of $1.21 per share on its common shares and the adjusted payout ratio was a conservative 45.2%, leaving plenty of room for growth and future dividend increases.

Common Equity Tier 1 under Basel lll accords was an excellent 10.9%. Canadian Imperial Bank of Commerce is a buy up to $85.

The Toronto-Dominion Bank (TD) also had good results. EPS came in at $1.24 under GAAP and $1.27 without amortized intangibles.

I consider the latter figure quite reasonable, since I don't think such amortization reflects anything real. If the market wants to judge how intangible assets are performing, it can compare return on assets before and after those assets are acquired.

In any case, EPS were up 4% or 6% year-over-year, depending on which metric one prefers. The only weak number I saw in the report was that the net interest margin was a bit below peer average at 2.79%, but as long as the bottom line grows, I'm happy.

In fact, TD's efficiency ratio was an outstanding 41.5%, which obviously made up for the poor net interest margin. I don't know what caused the better efficiency this quarter, but I hope it continues.

Over on the balance sheet, Common Equity Tier 1 Ratio was an excellent 10.4%. Toronto-Dominion Bank is a buy up to $46.

Subscribe to Jack Adamo's Insiders Plus here…

By Jack Adamo, Editor of Insiders Plus

Related Articles on GLOBAL