Bank Primer 2018 (2018.02).pdf - INSTITUTIONAL EQUITY...

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Unformatted text preview: INSTITUTIONAL EQUITY RESEARCH Robert Sedran, CFA 1 (416) 594-7874 [email protected] Marco Giurleo, CFA 1 (416) 956-3723 [email protected] Financials Bank Primer - 2018 Christopher Bailey 1 (416) 594-7283 [email protected] INDUSTRY PRIMER February 20, 2018 Canadian Banking 101 All figures in Canadian dollars, unless otherwise stated. 18-152284 © 2018 CIBC World Markets Corp., the U.S. broker-dealer, and CIBC World Markets Inc., the Canadian broker-dealer (collectively, CIBC World Markets Corp./Inc.) do and seek to do business with companies covered in its research reports. As a result, investors should be aware that CIBC World Markets Corp./Inc. may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For required regulatory disclosures please refer to "Important Disclosures" beginning on page 144. Find CIBC research on Bloomberg, Thomson Reuters, FactSet, Capital IQ and ResearchCentral.cibcwm.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 (416) 594-7000 CIBC World Markets Corp., 425 Lexington Avenue, New York, NY 10017 (212)-856-4000 108 Bank Primer - 2018 - February 20, 2018 Table of Contents Canadian Banks Snapshot .................................................................... 4 Summary Income Statements ............................................................... 5 Common-Sized Income Statements ........................................................ 6 Summary Balance Sheets ..................................................................... 7 Common-Sized Balance Sheets .............................................................. 8 Introduction – Banking 101 – Version VI.................................................... 9 Optimism Around Bank Outlook ......................................................... 11 Section 1 – The Canadian Banking Industry .............................................. 13 Canadian Regulatory Framework ....................................................... 13 Wealth Management Regulation ........................................................ 17 A Short History Of Canadian Banking ................................................... 19 Market Structure & Market Share .................................................... 19 Consolidation History................................................................... 21 Section 2 – Canada In The World ........................................................... 24 Differences Between Canada And The United States ............................... 26 Banking Is More Concentrated In Canada ........................................... 26 Banks Are More Diversified In Canada ............................................... 26 Margins Are Lower In Canada ......................................................... 27 Leverage Is Higher In Canada ......................................................... 28 Canadian Banks Are More Profitable ................................................ 28 Canadian Banks Trade At A Higher P/B ............................................. 28 Canadian Banks Operating In A More Stable Risk… ................................ 29 …And Regulatory Environment ....................................................... 29 The Canadian Mortgage Market ......................................................... 30 Market Structure And Key Players ................................................... 30 Mortgage Insurance ..................................................................... 31 Mortgage Securitization In Canada .................................................. 32 Key Changes To Mortgage Insurance Rules ......................................... 34 B-20 Regulations ........................................................................ 35 Key Differences Between Canadian And U.S. Mortgages ......................... 38 Section 3 – Financial Statement Analysis ................................................. 39 Common-sized Income Statements ..................................................... 40 Reviewing Key Earnings Drivers ......................................................... 40 Lending Net Interest Income .......................................................... 41 Lending Net Interest Margin .......................................................... 42 Capital Markets Related Revenues (CMRR) ......................................... 44 Fee-based Income ...................................................................... 46 Net Securities Gains / (Losses) ....................................................... 47 Provisions For Credit Losses ........................................................... 47 Balance Sheet ................................................................................. 56 2 109 Bank Primer - 2018 - February 20, 2018 Common-sized Balance Sheets .......................................................... 57 Assets ........................................................................................ 58 Loans ...................................................................................... 58 Liabilities .................................................................................... 63 Deposits................................................................................... 63 Other Liabilities ......................................................................... 64 Section 4 – Profitability Measures ......................................................... 66 Section 5 – A Review Of Valuation ......................................................... 71 Section 6 – Capital Adequacy ............................................................... 83 Section 7 – Dividend Policy ................................................................. 90 Section 8 – Company Overviews............................................................ 93 Bank of Montreal ........................................................................... 93 Bank of Nova Scotia ....................................................................... 99 CIBC ........................................................................................ 104 National Bank ............................................................................. 108 Royal Bank ................................................................................ 112 TD Bank .................................................................................... 119 Canadian Western Bank ................................................................ 125 Laurentian Bank .......................................................................... 128 Section 9 – Frequently Asked Questions ................................................ 130 Section 10 – Key Terms & Concepts ..................................................... 139 3 110 Canadian P&C Capital Markets Wealth & Insurance International / U.S. P&C Bank of Montreal Scotiabank CIBC National Bank Royal Bank TD Bank CWB Market Capitalization ($mm) 1 $63,363 $92,875 $50,706 $21,085 $146,162 $133,941 $3,398 Laurentian Bank $2,020 Total Assets ($mm) $709,580 $915,273 $565,264 $245,827 $1,212,853 $1,278,995 $26,447 $46,683 Target Dividend Payout Range 40%-50% 40%-50% 40%-50% 40%-50% 40%-50% 40%-50% 25%-30% 40%-50% Book Value ($mm) $40,114 $55,454 $29,238 $10,700 $67,416 $69,464 $2,196 $1,996 Head Office Toronto, ON Toronto, ON Toronto, ON Montreal, QC Toronto, ON Toronto, ON Edmonton, AB Montreal, QC Chief Executive Officer Darryl White Brian Porter Victor Dodig Louis Vachon David McKay Bharat Masrani Chris Fowler François Desjardins % of Net Income (Avg. L8Q) 39% 40% 63% 41% 49% 45% n/a n/a Average Assets ($mm) $220,852 $318,200 $304,981 $97,665 $408,200 n/a n/a n/a 2 $218,909 $315,100 $305,527 $97,343 $403,100 $385,300 n/a n/a Residential Mortgages ($mm) $100,238 $192,600 $201,000 $53,679 $235,200 $189,400 $4,064 $18,486 Average Loans & Bas ($mm) No. of Branches 926 963 1,076 429 1,235 1,128 42 104 Core F2017 Efficiency Ratio 49.6% 46.1% 49.9% 53.8% 43.8% 42.5% n/a n/a F2017 Net Income Growth 6% 11% 7% 24% 7% 9% n/a n/a % of Net Income (Avg. L8Q) 21% 22% 24% 35% 22% 9% n/a n/a Quarterly Trading Rev (Avg L8Q) $430 $438 $345 $238 $883 $419 n/a Quarterly Advisory Rev (Avg L8Q) $232 $149 $112 $91 $496 $142 n/a Ranking, All Financings (Cda, 2017) 4 6 3 5 1 2 13 No. Of Employees (FTE) 2,502 2,413 1,314 701 3,970 4,043 n/a F2017 Net Income Growth 5% 16% 7% 13% 11% 13% n/a 20% 18% (7% Insurance, 6% Investor & Treasury) 9% (5% Insurance) $634,100 $365,526 $410,579 % of Net Income (Avg. L8Q) 17% (4% Insurance) 12% 10% AUM ($mm) $429,448 $207,000 $221,143 $65,541 (+ $123,003 @ Fiera)3 n/a n/a AUA ($mm) $359,773 $403,000 $348,517 $411,817 $929,200 IFIC Ranking (mutual funds) 4 8 7 6 11 1 3 Average Deposits ($mm)5 $33,281 $22,000 $5,727 $30,087 $90,900 $23,300 F2017 Net Income Growth 18% 16% 25% 27% 19% 8% % of Net Income (Avg. L8Q) 18% 26% 3% 5% < 5% 30% n/a n/a United States Specialty Finance & Caribbean P&C (City National Included in U.S. P&C n/a n/a Nature of Business U.S. P&C International P&C U.S. Commercial Banking & Wealth Average Loans & BAs ($mm) $90,256 $110,300 $28,835 $7,565 $8,900 $185,200 Change in NIM 2017 Y/Y (bps) 12 8 nmf n/a n/a (2) 1,270 No. of Branches 573 1,761 46 n/a 68 Deposit Rank in U.S. (2017) 21 n/a 55 n/a n/a 7 F2017 Net Income Growth 0% 15% nmf 80% (1%) 16% Bank Primer - 2018 - February 20, 2018 4 Canadian Banks Snapshot Source: Company Reports, IFIC, Bloomberg, SNL Financial, CIBC World Markets Inc. (1) Market Capitalization as of February 15, 2018 (2) For CM, includes average commercial and wealth management loans from Canadian Commercial Banking and Wealth Management segment (3) NA owns 21% of Fiera Capital (4) Rankings as of December 2017 (5) CM - Wealth Management deposits under Canadian Commercial Banking and Wealth Management; T D - Canadian Retail Wealth Deposits 111 Bank Primer - 2018 - February 20, 2018 Summary Income Statements Exhibit 1. Condensed Income Statements - F2017 $million Lending Net Interest Income (A x B) Fee Income (1) Insurance Related Revenue Sub-Total Capital Markets: Trading revenue Underwriting & advisory fees Securities commissions & fees TD Waterhouse fees Treasury and Financial Markets Brokerage Operations Gross Capital Markets Related Revenue (C) Securities Gains / (Losses) Total Revenue Provision for Credit Losses Non-Interest Expenses: Salaries & benefits Variable compensation (D) Total Compensation Premises & Equipment Other Fixed Expenses Sub-Total Non-Interest Expenses Insurance Related Expenses Total Expenses Net Income Before Tax (TEB adjusted) Income Taxes Non-Controlling Interest AMTD contribution (after-tax) Net Income Pref Dividend, Amortization of Intangibles & other Adjusted Earnings Adjusted EPS MAJOR EARNINGS DRIVERS Lending Net Interest Income: Non-trading average earning assets (A) Lending net interest margin (B) Provision for Credit Losses: Average net loans and acceptances Loan loss ratio Effective tax rate Fully diluted shares Variable compensation ratio (D / C) BMO 10,219 7,000 17,219 BNS 15,035 8,862 23,897 CM 8,128 5,834 13,962 NA 2,844 2,309 5,153 RY 14,992 14,264 4,566 33,822 TD 20,090 10,380 30,470 CWB 644.7 77.9 722.5 LB 638.1 265.4 903.5 1,707 1,036 969 3,712 171 21,102 (850) 1,813 598 1,021 3,432 380 27,709 (2,249) 1,369 452 349 2,170 143 16,275 (794) 1,006 349 216 1,571 140 6,864 (269) 3,502 2,093 1,416 7,011 172 41,005 (1,150) 1,714 589 960 493 3,756 128 34,354 (2,216) 0.0 0.7 723.2 (51.0) 17.8 75.1 92.9 996 (37.0) (5,007) (2,381) (7,388) (2,430) (3,338) (13,156) (13,156) 7,096 (1,872) (2) 5,222 (68) 5,154 $7.91 (5,567) (1,808) (7,375) (2,776) (4,479) (14,630) (14,630) 10,830 (2,587) (238) 8,005 (15) 7,990 $6.54 (3,443) (1,745) (5,188) (2,437) (1,728) (9,353) (9,353) 6,128 (1,478) (19) 4,631 (24) 4,607 $11.14 (1,433) (915) (2,348) (804) (686) (3,838) (3,838) 2,757 (727) (84) 1,947 (85) 1,862 $5.40 (8,127) (5,203) (13,330) (3,022) (5,400) (21,752) (3,053) (24,805) 15,050 (3,766) (41) 11,243 (79) 11,164 $7.57 (7,564) (2,454) (10,018) (2,786) (6,536) (19,340) (19,340) 12,798 (2,912) (121) 469 10,234 39 10,273 $5.54 (220.4) (220.4) (60.3) (64.7) (345.5) (345.5) 326.7 (88.8) (1.1) 236.8 (8.7) 228.1 $2.58 (295.7) (65.3) (361.0) (182.4) (115.1) (658.5) (658.5) 300.9 (70.2) 0.0 230.7 (17.1) 213.6 $6.08 555,351 1.84% 734,861 2.05% 431,045 1.89% 178,124 1.60% 863,281 1.74% 952,736 2.11% 24,199 2.66% 32,254 1.98% 356,006 0.24% 26.4% 652 64% 481,619 0.47% 23.9% 1,221 53% 305,619 0.26% 24.1% 414 80% 121,166 0.22% 26.4% 328 58% 520,040 0.22% 25.0% 1,475 74% 580,464 0.38% 22.8% 1,835 65% 20,924 0.24% 27.2% 89 - 31,524 0.12% 23.3% 35 70% (1) Fee income represents other income ex cluding capital markets related rev enue, securitization rev enue, and securities gains / (losses). Source: Company reports and CIBC World Markets Inc. 5 112 Bank Primer - 2018 - February 20, 2018 Common-Sized Income Statements Exhibit 2. Condensed Income Statements - F2017, Common-Sized $million Lending Net Interest Income Fee Income Insurance Related Revenue Sub-Total Capital Markets: Trading revenue Underwriting & advisory fees Securities commissions & fees TD Waterhouse fees Treasury and Financial Markets Brokerage Operations Gross Capital Markets Related Revenue Securities Gains / (Losses) Total Revenue Provision for Credit Losses Non-Interest Expenses: Salaries & benefits Variable compensation Total Compensation Premises & Equipment Other Fixed Expenses Sub-Total Fixed Expenses Insurance Related Expenses Total Expenses Net Income Before Tax (TEB adjusted) Income Taxes Non-Controlling Interest AMTD contribution (after-tax) Net Income Pref Dividend, Amortization of Intangibles & other Adjusted Earnings BMO 48% 33% 82% BNS 54% 32% 86% CM 50% 36% 86% NA 41% 34% 75% RY 37% 35% 11% 82% TD 58% 30% 89% CWB 89% 11% 100% LB 64% 27% 91% 8% 5% 5% 18% 1% 100% (4%) 7% 2% 4% 12% 1% 100% (8%) 8% 3% 2% 13% 1% 100% (5%) 15% 5% 3% 23% 2% 100% (4%) 9% 5% 3% 17% 0% 100% (3%) 5% 2% 3% 1% 11% 0% 100% (6%) 0% 0% 100% (7%) 2% 8% 9% 100% (4%) (24%) (11%) (35%) (12%) (16%) (62%) (62%) 34% (9% ) (0% ) 25% (0%) 24% (20%) (7%) (27%) (10%) (16%) (53%) (53%) 39% (9% ) (1% ) 29% (0%) 29% (21%) (11%) (32%) (15%) (11%) (57%) (57%) 38% (9% ) (0% ) 28% (0%) 28% (21%) (13%) (34%) (12%) (10%) (56%) (56%) 40% (11% ) (1% ) 28% (1%) 27% (20%) (13%) (33%) (7%) (13%) (53%) (7% ) (60%) 37% (9% ) (0% ) 27% (0%) 27% (22%) (7%) (29%) (8%) (19%) (56%) (56%) 37% (8% ) (0% ) 1% 30% 0% 30% (30%) (30%) (8%) (9%) (48%) (48%) 45% (12% ) (0% ) 33% (1%) 32% (30%) (7%) (36%) (18%) (12%) (66%) (66%) 30% (7% ) 23% (2%) 21% Source: Company reports and CIBC World Markets Inc. 6 113 Bank Primer - 2018 - February 20, 2018 Summary Balance Sheets Exhibit 3. Condensed Balance Sheets - F2017 $million Assets: Cash and deposits with banks Precious metals Securities Securities borrowed/purchased under resale agreements Loans Residential mortgages Personal loans & credit cards Business & government Customers' liability under acceptances Allowance for credit losses Total net loans and acceptances Other assets Derivative instruments Premises and equipment Goodwill & other intangibles Other Total Assets Liabilities & Equity: Deposits Individual Business & government, banks and other Total deposits Other liabilities Derivative instruments Acceptances Securities sold but not yet purchased Securities lent or sold under repurchase agreements Other Subordinated debt Debt securities Debt related to securitization activities Share capital Preferred shares Common shares Contributed surplus/other reserves Retained earnings Accumulated other comprehensive income (loss) & other Total shareholders' equity Non-controlling interest in subsidiaries Total Liabilities & Equity BMO BNS CM NA RY TD CWB LB 39,089 163,198 75,047 59,663 5,717 167,746 95,319 14,152 93,419 45,418 8,802 65,343 20,789 61,069 218,379 220,977 55,156 325,724 134,429 522 2,187 0 327 5,586 3,108 115,258 70,015 178,232 363,505 16,546 (1,833) 378,218 236,916 103,331 168,449 508,696 13,560 (4,327) 517,929 207,271 53,315 97,766 358,352 8,824 (1,618) 365,558 50,518 36,963 41,690 129,171 5,991 (719) 134,443 270,348 114,822 159,606 544,776 16,459 (2,159) 559,076 222,079 190,108 204,187 616,374 17,297 (3,783) 629,888 4,354 372 18,620 23,346 (116) 23,229 18,486 6,039 11,464 35,989 707 (99) 36,597 28,951 2,033 6,244 16,800 709,580 35,364 2,365 12,106 19,064 915,273 24,342 1,783 7,345 13,247 565,264 8,423 558 1,409 6,060 245,827 95,023 2,670 15,484 40,175 1,212,853 56,195 5,313 18,774 53,516 1,278,995 56 235 218 26,447 104 35 412 513 46,683 168,311 315,177 483,488 200,030 425,337 625,367 159,327 239,411 398,738 53,719 102,952 156,671 260,213 529,422 789,635 468,155 364,669 832,824 13,395 8,508 21,903 21,199 7,731 28,930 27,804 16,546 25,163 55,119 52,077 5,029 - 34,200 13,560 30,766 95,843 47,977 5,935 - 23,271 8,828 15,737 27,971 56,273 3,209 - 6,612 5,991 15,363 21,767 25,856 9 - 92,127 16,459 30,008 143,084 57,847 9,265 - 51,214 17,297 35,482 88,591 156,112 9,528 12,757 604 250 1,226 - 218 707 2,165 2,679 1,074 348 8,231 4,240 13,032 307 23,709 3,066 44,354 0 709,580 4,579 15,644 116 38,117 1,577 60,033 1,592 915,273 1,797 12,548 137 16,101 452 31,035 202 565,264 2,050 2,768 58 7,706 168 12,750 808 245,827 6,413 17,730 45,359 4,327 73,829 599 1,212,853 4,750 20,931 214 40,489 7,823 74,207 983 1,278,995 265 732 1,489 (24) 2,461 3 26,447 342 954 1,036 (0) 2,330 46,683 Source: Company reports and CIBC World Markets Inc. 7 114 Bank Primer - 2018 - February 20, 2018 Common-Sized Balance Sheets Exhibit 4. Condensed Balance Sheets - F2017, Common-Sized $million Assets: Cash and deposits with banks Precious metals Securities Securities borrowed/purchased under resale agreements Loans Residential mortgages Personal loans & credit cards Business & government Customers' liability under acceptances Allowance for credit losses Total net loans and acceptances Other assets Derivative instruments Premises and equipment Goodwill & other intangibles Other Total Assets Liabilities & Equity: Deposits Individual Business & government, banks and other Total deposits Other liabilities Derivative instruments Acceptances Securities sold but not yet purchased Securities lent or sold under repurchase agreements Other Subordinated debt Debt securities Debt related to securitization activities Share capital Preferred shares Common shares Contributed surplus/other reserves Retained earnings Accumulated other comprehensive income (loss) & other Total shareholders' equity Non-controlling interest in subsidiaries Total Liabilities & Equity BMO BNS CM NA RY TD CWB LB 6% 23% 11% 7% 1% 18% 10% 3% 17% 8% 4% 27% 8% 5% 18% 18% 4% 25% 11% 2% 8% 0% 1% 12% 7% 16% 10% 25% 51% 2% (0% ) 53% 26% 11% 18% 56% 1% (0% ) 57% 37% 9% 17% 63% 2% (0% ) 65% 21% 15% 17% 53% 2% (0% ) 55% 22% 9% 13% 45% 1% (0% ) 46% 17% 15% 16% 48% 1% (0% ) 49% 16% 1% 70% 88% (0% ) 88% 40% 13% 25% 77% 2% (0% ) 78% 4% 0% 1% 2% 100% 4% 0% 1% 2% 100% 4% 0% 1% 2% 100% 3% 0% 1% 2% 100% 8% 0% 1% 3% 100% 4% 0% 1% 4% 100% 0% 1% 1% 100% 0% 0% 1% 1% 100% 24% 44% 68% 22% 46% 68% 28% 42% 71% 22% 42% 64% 21% 44% 65% 37% 29% 65% 51% 32% 83% 45% 17% 62% 4% 2% 4% 8% 7% 1% 0% 1% 2% 0% 3% 0% 6% 0% 100% 4% 1% 3% 10% 5% 1% 0% 1% 2% 0% 4% 0% 7% 0% 100% 4% 2% 3% 5% 10% 1% 0% 0% 2% 0% 3% 0% 5% 0% 100% 3% 2% 6% 9% 11% 0% 0% 1% 1% 0% 3% 0% 5% 0% 100% 8% 1% 2% 12% 5% 1% 0% 1% 1% 4% 0% 6% 0% 100% 4% 1% 3% 7% 12% 1% 1% 0% 0% 2% 0% 3% 1% 6% 0% 100% 2% 1% 5% 0% 1% 3% 6% (0% ) 9% 0% 100% 0% 2% 5% 6% 2% 1% 18% 0% 1% 2% 2% (0% ) 5% 0% 100% Source: Company reports and CIBC World Markets Inc. 8 115 Bank Primer - 2018 - February 20, 2018 Introduction – Banking 101 – Version VI This report is our sixth annual primer on the Canadian banks, which we hope will serve as a valuable document for new investors and generalists who may have a passing interest in the sector,...
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