Financials

 

The Company in a Nutshell

• Canadian bank revenues will increase as interest rate goes up.
• TD’s very lean structure plays a great role in its expansion.
• TD has a great presence in the US compared to other Canadian banks.

Business Model

TD is the second largest Canadian bank by market cap and is often playing side-by-side for the 1st position with Royal Bank (RY). TD is the most classic bank in Canada as its business model focuses a lot on retail banking. Its portfolio is well diversified between Canada (61%) and the U.S. (30%). As you can see, TD is mostly active on the US East Coast and shows no presence elsewhere.

source: TD Q3 2018 presentation

Canadian banks are not known for their success past the Southern borders. TD is definitely the model other banks are following in that manner. TD has successfully completed several acquisition on U.S. soil and used in-branch expertise to develop their network. In other to remain competitive, TD is developing its mobile services. To this date, it now shows over 12 million clients using their mobile apps.

Growth Vectors

What we like most about TD bank is how management keeps things clean and simple. As the bulk of their business is generated through classic banking activities such as personal and commercial savings and loans, there are hardly no surprises coming from their financial statements. TD enjoys the best of both worlds. On one side, it is the largest Canadian bank in term of total assets and total deposits. It evolves in a highly regulated oligopoly protecting TD (and its peers) from outsiders. On the other side, it has understood how to grow successfully through the U.S. market. As their economy is flourishing, TD is well-established on the East Coast to Capture this tailwind.

Potential Risks

As Canadian interest rates start rising, American investors may be concerned about currency headwinds. But, in a long-term perspective, the currency effect (one way or another) doesn’t affect much an investment return.

The Canadian housing market has always been a concern since 2012, but TD seems to manage its loan book wisely. There hasn’t bee a correction in the housing market back in 2008-2010 as compared to what happened in the U.S. This is how we find very expensive housing markets among Canadian largest cities such as Toronto, Vancouver, Calgary and Edmonton. A higher insured mortgage level in the prairies seems adequate while TD continues to ride the ever-growing downtown Toronto housing market.

Dividend Growth Perspective

TD is a Canadian dividend aristocrat (which permits a “pause” in the dividend increase streak). Management prefers to increase dividend once a year and did so with a 12% increase earlier this year. You can expect the next raise in early 2019. Shareholders can expect a mid single-digit to double-digit dividend growth going forward.

Final Thoughts

A stronger economy from both countries led to TD’s stronger results. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has a large exposition in major cities like Toronto, Vancouver, Edmonton and Calgary, combined with a strong presence in the US. If you are looking for an investment in a straight forward bank, TD is your pick. This banks is a good example of a perfect dividend triangle.

The Company in a Nutshell

• BNS shows a 7% (CAGR) dividend growth rate over the past 10 years.
• It is your ticket for an international bank with a solid core in Canada.
• Recent quarters were fueled by stronger commercial loan demand from its international business.

Business Model

ScotiaBank is the most international of the Canadian banks. It has built various geographic streams of income coming from Latin America and Asia (emerging markets). In fact, BNS is present in 55 countries. This is a strength other banks don’t have, especially when the Canadian economy is going through challenging periods.

Potential Risks

The bank run into several challenges such as the situation in Venezuela. It seems being present in emerging markets is not always a plus. Overall, diversification is a good strategy, but BNS international presence adds more volatility to its business model.

Dividend Growth Perspective

BNS management offered two dividend hikes in 2017. The first one brought its dividend from $0.74 to $0.76 and the next payment was of $0.79 per share. The two dividend payments come to a total of +6% increase. BNS also shows an annualized growth rate of 7% over the past 10 years.

Final Thoughts

BNS is the most innovative bank in the industry. It has done lots of business outside Canada, and always with an open mind. BNS deserves its international label with 40% of its assets outside Canadian borders. This hasn’t always been an advantage as BNS ran into its share of problems with Latin American economic struggles. However, things seem to get back on track as BNS year-end report shows EPS growth of 8% after adjustments. BNS still continues to find a solid ground in Canada with a +9% growth, but international banking (+15%) and global banking and markets (16%) are its real growth vectors. If BNS succeeds in its $2.9 billion acquisition in Chile, it will become the third largest bank of this country.

The Company in a Nutshell

• Royal bank raised its dividend twice a year, a nice tradition for shareholders.
• Royal Bank has been ranked highest in overall customer satisfaction for the second year in a row.
• RBC wealth management division will continue to be a growth vector going forward.

Business Model

Royal Bank is the largest bank of the group by market cap (it battles with TD) and provides various financial services to individuals as well as commercial and institutional clients. RY has a strong position in the personal and commercial banking sector (50% of its revenue). In 2015, RY bought City National, a Los Angeles-based bank focused on high net worth clients. The transaction opened US doors and another growth vector: wealth management.

Potential Risks

After the last market crash, the bank put its focus on growing its smaller sectors. While wealth management should continue to post stable income, the insurance and capital markets are more inclined to hectic returns. As the largest Canadian bank, Royal Bank could also get hurt by a bearish housing market

Dividend Growth Perspective

Royal Bank has a “tradition” of increasing its dividend twice a year. Therefore, you can count on two low-single digit dividend growth per year. It paused its dividend growth policy between 2008 and 2010, but came back with the double dividend growth tradition in 2012. Even with the crisis, RBC sustained a distribution growth of 8% CAGR for the past 5 years. For our DDM valuation, we have used a 6% dividend growth rate to keep a conservative approach.

Final Thoughts

Over the past 5 years, RY did well because of its smaller divisions acting as growth vectors. The insurance, wealth management and capital markets push RY revenue. Those sectors combined now represent about 50% of its revenue. Royal bank also made huge efforts into diversifying its activities outside Canada. Canadian banks are protected by federal regulations, but this limits their growth. Having a foot outside of the country helps RY to reduce risk and to improve growth potential.