Bank Primer (2019) - CIBC.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 - 2019 Christopher Bailey 1 (416) 594-7283 [email protected] INDUSTRY PRIMER February 21, 2019 Canadian Banking 101 All figures in Canadian dollars, unless otherwise stated. 19-158172 © 2019 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 146. 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 Bank Primer - 2019 - February 21, 2019 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 VII ................................................... 9 Volatility Is A Sign Of The Times ........................................................... 11 Section 1 – The Canadian Banking Industry .............................................. 13 Canadian Regulatory Framework ....................................................... 13 Wealth Management Regulations ....................................................... 17 A Short History Of Canadian Banking ................................................... 19 Market Structure & Market Share ....................................................... 19 International Input – The Basel Committee On Banking Supervision ............. 22 International Input – The Volcker Rule................................................. 23 Section 2 – Canada In The World ........................................................... 24 Difference Between Canada And The United States ................................ 26 The Canadian Mortgage Market ......................................................... 30 Canadian Mortgage and Housing Corporation (CMHC) ............................... 32 National Housing Act Mortgage Backed Securities Program ........................ 32 Canadi23an Mortgage Bonds Program .................................................. 33 Covered Bond Program ................................................................... 33 Disclosure Requirements ................................................................. 36 Section 3 – Financial Statement Analysis ................................................. 39 Reviewing Key Earnings Drivers ......................................................... 40 Lending Net Interest Income ............................................................ 41 Lending Net Interest Margin ............................................................. 42 The Prime/BA Spread: A Useful Guide For Loan Spreads ........................... 43 What Does The Current Environment Mean For NII? ................................. 44 Capital Markets Related Revenues (CMRR) ............................................ 44 A Closer Look At Capital Markets Revenue Volatility ................................ 45 Forecasting Capital Markets Related Revenues ...................................... 45 Fee-based Income ......................................................................... 46 Forecasting Fee-based Income .......................................................... 46 Net Securities Gains / (Losses) .......................................................... 46 Provisions For Credit Losses ............................................................. 47 Some History On Canadian Bank Provisioning ........................................ 50 Mortgage Delinquencies And Loss Rates ............................................... 51 Credit Card Delinquencies And Loss Rates ............................................ 52 Forecasting The Credit Cycle ............................................................ 52 Non-interest Expenses .................................................................... 53 2 Bank Primer - 2019 - February 21, 2019 Balance Sheet .............................................................................. 56 Common-sized Balance Sheets .......................................................... 57 Assets ........................................................................................ 58 Liabilities .................................................................................... 63 Section 4 – Profitability Measures ......................................................... 66 Section 5 – A Review Of Valuation ......................................................... 71 Price-to-forward Earnings Ratios ....................................................... 71 Price-to-book Ratios ...................................................................... 71 How The DDM Model Works .............................................................. 76 Application .................................................................................. 77 Major Assumptions In Our DCF Models ................................................. 77 What Does CAPM Tell Us About The Cost Of Equity? ................................ 78 Method 1 – Earnings Multiples Excluding Excess Capital ............................ 79 Share Price Performance ................................................................. 80 Section 6 – Capital Adequacy ............................................................... 83 Capital Requirements – Contingent Capital Comes Into Play ...................... 86 Risk-weighted Assets (RWAs) – Credit, Market, Operational ....................... 87 Leverage Ratio – A Blunt Instrument ................................................... 88 Liquidity Rules To Make System More Self-sufficient ............................... 89 Total Loss Absorbing Capital (TLAC) ................................................... 90 Section 7 – Dividend Policy ................................................................. 91 Section 8 – Company Overviews............................................................ 94 Bank of Montreal ........................................................................... 94 Bank of Nova Scotia ..................................................................... 100 CIBC ........................................................................................ 105 National Bank ............................................................................. 109 Royal Bank ................................................................................ 113 TD Bank .................................................................................... 120 Canadian Western Bank ................................................................ 126 Laurentian Bank .......................................................................... 129 Section 9 – Frequently Asked Questions ................................................ 131 Section 10 – Key Terms & Concepts ..................................................... 141 3 Bank of Montreal Scotiabank CIBC National Bank Royal Bank TD Bank CWB Laurentian Bank $62,571 $91,522 $49,557 $20,791 $145,112 $136,885 $2,653 $1,826 Total Assets ($mm) $774,048 $998,493 $597,099 $262,471 $1,334,734 $1,334,903 $29,021 $45,895 Target Dividend Payout Range 40%-50% 40%-50% 40%-50% 40%-50% 40%-50% 40%-50% 25%-30% 40%-50% International / U.S. P&C Wealth & Insurance Capital Markets Canadian P&C Market Capitalization ($mm) 1 Book Value ($mm) $41,387 $61,044 $32,693 $11,526 $73,555 $74,054 $2,321 $2,260 Head Office Toronto, ON Toronto, ON Toronto, ON Montreal, QC Toronto, ON Toronto, ON Edmonton, AB Montreal, QC Chief Executive Officer Darryl White Brian Porter Victor Dodig Louis Vachon David McKay Bharat Masrani Chris Fowler François Desjardins % of Net Income (Avg. L8Q) 39% 40% 61% 40% 47% 44% n/a n/a Average Assets ($mm) $227,778 $331,500 $314,733 $103,102 $428,400 n/a n/a n/a $226,070 $329,000 $315,713 $102,839 $423,200 $409,100 n/a n/a $99,987 $202,500 $202,000 $39,800 $246,900 $192,500 $4,911 $16,986 Average Loans & Bas ($mm) 2 Residential Mortgages ($mm) Number of Branches 908 955 1,049 428 1,203 1,098 41 96 Core F2018 Efficiency Ratio 49.3% 46.2% 47.9% 53.1% 42.5% 42.0% n/a n/a F2018 Net Income Growth 9% 9% 14% 11% 9% 10% n/a n/a % of Net Income (Avg. L8Q) 20% 21% 21% 32% 22% 9% n/a n/a Quarterly Trading Rev (Avg L8Q) $422 $383 $348 $267 $866 $433 n/a Quarterly Advisory Rev (Avg L8Q) $247 $139 $109 $92 $518 $144 n/a Ranking, All Financings (Cda, 2018) 4 6 3 5 1 2 10 Number Of Employees (FTE) 2,700 2,539 1,396 706 4,162 4,426 n/a F2018 Net Income Growth (8%) (3%) (2%) 9% 10% 1% n/a 21% 19% (6% Insurance, 6% Investor & Treasury) 9% (5% Insurance) $664,900 $356,932 $970,500 $413,821 % of Net Income (Avg. L8Q) 17% (4% Insurance) 12% 10% AUM ($mm) $438,274 $282,000 $224,577 $382,839 $444,000 $349,010 AUA ($mm) IFIC Ranking (mutual funds) 4 Average Deposits ($mm)5 $68,881 (+ $143,475 @ Fiera)3 $416,199 8 3 6 13 1 2 $33,968 $21,100 $5,265 $32,185 $91,800 $23,700 n/a n/a F2018 Net Income Growth 8% 6% 12% 17% 21% 16% % of Net Income (Avg. L8Q) 20% 28% 8% 7% < 5% 33% n/a n/a United States Specialty Finance & Caribbean P&C (City National in Wealth) U.S. P&C n/a n/a $198,000 Nature of Business U.S. P&C International P&C U.S. Commercial Banking & Wealth Average Loans & BAs ($mm) $102,853 $144,300 $31,827 $8,218 $9,000 Change in NIM 2018 Y/Y (bps) 3 (14) 38 n/a n/a 17 Number of Branches 571 1,865 22 n/a 58 1,257 Deposit Rank in U.S. (2018) 20 n/a 56 n/a 28 7 F2018 Net Income Growth 32% 16% nmf 19% (10%) 23% Source: Company reports, IFIC, Bloomberg, SNL Financial, and CIBC World Markets Inc. 1 – Market Capitalization as of February 13, 2019 2 – For CIBC, includes average commercial and wealth management loans from the Canadian Commercial Banking and Wealth Management segment 3 – National Bank owns 18% of Fiera Capital 4 – Rankings as of November 2018 5 – CIBC – Wealth Management deposits under Canadian Commercial Banking and Wealth Management segment; TD – Canadian Retail: Average Deposits - Wealth Bank Primer - 2019 - February 21, 2019 4 Canadian Banks Snapshot Bank Primer - 2019 - February 21, 2019 Summary Income Statements Exhibit 1. Condensed Income Statements - F2018 $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 10,788 7,338 18,126 BNS 16,191 9,609 25,800 CM 9,426 6,470 15,896 NA 3,336 2,293 5,629 RY 16,216 15,623 4,279 36,118 TD 21,718 10,852 32,570 CWB 725.0 78.6 803.6 LB 705.9 253.4 959.3 1,668 936 1,029 3,633 239 21,998 (662) 1,521 514 895 2,930 146 28,876 (2,207) 1,413 420 357 2,190 26 18,112 (842) 1,131 388 195 1,714 77 7,420 (327) 3,428 2,053 1,372 6,853 147 43,118 (1,307) 1,749 566 1,041 577 3,933 111 36,614 (2,480) 0.0 (0.2) 803.4 (48.3) 18.3 65.8 84.1 1,043 (44.0) (4,994) (2,508) (7,502) (2,738) (3,356) (13,596) (13,596) 7,740 (1,851) 0 5,889 (94) 5,795 $8.99 (5,842) (1,816) (7,658) (2,931) (4,571) (15,160) (15,160) 11,509 (2,577) (298) 8,634 (58) 8,576 $6.98 (3,687) (1,966) (5,653) (2,598) (1,928) (10,179) (10,179) 7,091 (1,635) (22) 5,434 (4) 5,430 $12.21 (1,522) (941) (2,463) (856) (733) (4,052) (4,052) 3,041 (792) (87) 2,162 (105) 2,057 $5.99 (8,179) (5,597) (13,776) (3,151) (5,877) (22,804) (2,676) (25,480) 16,331 (3,700) (31) 12,600 (51) 12,549 $8.65 (7,785) (2,592) (10,377) (2,838) (6,901) (20,116) (20,116) 14,018 (2,978) (72) 874 11,842 55 11,897 $6.47 (237.2) (237.2) (62.8) (73.5) (373.5) (373.5) 381.6 (102.2) (1.1) 278.3 (9.6) 268.7 $3.01 (309.9) (56.1) (366.0) (192.4) (137.4) (695.8) (695.8) 303.6 (62.1) 0.0 241.6 (14.0) 227.5 $5.52 590,313 1.83% 771,196 2.10% 482,976 1.95% 188,705 1.77% 964,007 1.68% 1,026,781 2.12% 25,125 2.89% 35,704 1.98% 385,983 0.17% 23.9% 645 69% 541,641 0.41% 22.4% 1,228 62% 373,085 0.23% 23.1% 445 90% 140,318 0.23% 26.0% 328 55% 570,434 0.23% 22.7% 1,451 82% 640,545 0.39% 21.2% 1,835 66% 24,604 0.20% 26.8% 89 - 35,915 0.12% 20.4% 41 67% 1 – Fee income represents other income excluding capital markets related revenues, and securities gains/losses. 2 – Figures are adjusted for one-time items where appropriate. Source: Company reports and CIBC World Markets Inc. 5 Bank Primer - 2019 - February 21, 2019 Common-sized Income Statements Exhibit 2. Condensed Income Statements - F2018 - 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 Source: Company reports and CIBC World Markets Inc. 6 BMO 49% 33% 82% BNS 56% 33% 89% CM 52% 36% 88% NA 45% 31% 76% RY 38% 36% 10% 84% TD 59% 30% 89% CWB 90% 10% 100% LB 68% 24% 92% 8% 4% 5% 17% 1% 100% (3%) 5% 2% 3% 10% 1% 100% (8%) 8% 2% 2% 12% 0% 100% (5%) 15% 5% 3% 23% 1% 100% (4%) 8% 5% 3% 16% 0% 100% (3%) 5% 2% 3% 2% 11% 0% 100% (7%) 0% (0%) 100% (6%) 2% 6% 8% 100% (4%) (23%) (11%) (34%) (12%) (15%) (62%) (62%) 35% (8% ) 0% 27% (0%) 26% (20%) (6%) (27%) (10%) (16%) (53%) (53%) 40% (9% ) (1% ) 30% (0%) 30% (20%) (11%) (31%) (14%) (11%) (56%) (56%) 39% (9% ) (0% ) 30% (0%) 30% (21%) (13%) (33%) (12%) (10%) (55%) (55%) 41% (11% ) (1% ) 29% (1%) 28% (19%) (13%) (32%) (7%) (14%) (53%) (6% ) (59%) 38% (9% ) (0% ) 29% (0%) 29% (21%) (7%) (28%) (8%) (19%) (55%) (55%) 38% (8% ) (0% ) 2% 32% 0% 32% (30%) (30%) (8%) (9%) (46%) (46%) 48% (13% ) (0% ) 35% (1%) 33% (30%) (5%) (35%) (18%) (13%) (67%) (67%) 29% (6% ) 23% (1%) 22% Bank Primer - 2019 - February 21, 2019 Summary Balance Sheets Exhibit 3. Condensed Balance Sheets - F2018 $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 50,447 180,935 85,051 62,269 3,191 178,670 104,018 17,691 101,664 48,938 12,756 69,783 18,159 66,680 222,866 294,602 35,455 373,301 127,379 153 2,085 0 491 6,061 3,652 119,620 71,554 194,456 385,630 18,585 (1,639) 402,576 253,357 112,504 191,038 556,899 16,329 (5,065) 568,163 207,749 55,731 109,555 373,035 10,265 (1,639) 381,661 53,651 39,682 46,606 139,939 6,801 (658) 146,082 282,471 116,981 180,278 579,730 15,641 (2,912) 592,459 225,191 207,097 217,654 649,942 17,267 (3,549) 663,660 4,911 336 21,086 26,333 (129) 26,205 16,986 5,372 11,839 34,198 197 (93) 34,302 26,204 1,986 8,645 18,204 774,048 37,558 2,648 17,719 24,257 998,493 21,431 1,795 7,509 16,410 597,099 8,608 601 2,726 3,756 262,471 94,039 2,832 15,824 45,432 1,334,734 56,996 5,324 18,995 53,793 1,334,903 59 246 274 29,021 94 81 484 729 45,895 180,844 341,207 522,051 214,545 461,989 676,534 163,879 254,529 418,408 55,688 115,142 170,830 270,154 566,892 837,046 477,644 373,795 851,439 14,484 9,216 23,700 20,995 7,011 28,007 24,411 18,585 28,804 66,684 61,004 6,782 - 37,967 16,338 32,087 101,257 60,932 5,698 - 20,973 10,296 16,513 30,840 60,873 4,080 - 6,036 6,801 17,780 19,998 25,924 747 - 90,238 15,662 32,247 206,814 63,641 9,131 - 48,270 17,269 39,478 93,389 183,660 8,740 12,618 95 630 250 1,758 - 285 197 3,009 2,516 1,249 349 7,788 4,340 12,929 300 25,856 2,302 45,727 0 774,048 4,184 18,234 404 41,414 992 65,228 2,452 998,493 2,250 13,243 136 18,537 777 34,943 173 597,099 2,450 2,822 57 8,472 175 13,976 379 262,471 6,306 17,635 51,112 4,808 79,861 94 1,334,734 5,000 21,221 193 46,145 6,488 79,047 993 1,334,903 265 745 1,649 (73) 2,586 3 29,021 244 1,115 1,152 (16) 2,496 45,895 Source: Company reports and CIBC World Markets Inc. 7 Bank Primer - 2019 - February 21, 2019 Common-sized Balance Sheets Exhibit 4. Condensed Balance Sheets - F2018 - 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 Source: Company reports and CIBC World Markets Inc. 8 BMO BNS CM NA RY TD CWB LB 7% 23% 11% 6% 0% 18% 10% 3% 17% 8% 5% 27% 7% 5% 17% 22% 3% 28% 10% 1% 7% 0% 1% 13% 8% 15% 9% 25% 50% 2% (0% ) 52%...
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