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Canadian Bank Face-Off
Unlike the United States where there are literally thousands of independent banks, not to mention five different regulatory bodies, the Canadian banking market is an oligopoly and as a result has a more benign regulatory environment than in America.
The old joke on Wall Street is that there is no such thing as a domestic bank - they're all international these days. Canada is home to at least half a dozen world class banks and we're going to take a look at three of them.
Huge Non-Interest Income
Royal Bank of Canada (NYSE:RY) is Canada's largest bank with assets of C$475 billion (all figures in the article given in Canadian dollars unless otherwise stated), 1,400 branches and 14 million customers in North America and 30 other countries. Royal Bank generates over $20.6 billion in revenue and enjoys a market capitalization of $66.6 billion.
The good news with Royal Bank is that of its $20.6 million in revenue, 63% of it comes from non-interest income. That is a big deal because it reduces the bank's exposure to interest rate risk. In comparison, other Canadian banks earn about 55% of their revenue in non-interest income and Royal's U.S. peer group earns roughly 48%.
Royal Bank's financial results are testament to its success. Five years ago, Royal's revenue averaged -8.4% in growth. The bank has since turned that around to average 6.8% over the last three years and 7.4% last year. Earnings have seen a similar improvement with a year-over-year growth rate of 38.6%. Royal operates with a net margin of almost 23% and posts an impressive 23.5% return on equity (ROE). (For greater insight, see Analyzing A Bank's Financial Statements.)
Expanding South of the Border
Toronto Dominion Bank (NYSE:TD) is Canada's third largest bank as measured by its market capitalization of just over $48.5 billion. TD generates roughly $13.1 billion in revenue from $390 billion in assets with about 55% of that revenue coming from its retail and commercial banking operations. TD tries to differentiate itself by focusing on customer service and convenience such as extended hours at its branches.
Toronto Dominion has tried to expand into the U.S. market by purchasing Banknorth, based in New England. With the plethora of banks in the U.S., earning the same kind of returns as TD earns in Canada is proving to be difficult, even with TD's capabilities in insurance, wealth management and the capital markets.
You can't argue with TD's results. Revenue growth, averaging a growth rate of 3.9% over the previous five years has improved to 9.3% when averaged over the last three years and last year saw a growth rate of 10.2%. Growth in TD's earnings has been even more impressive averaging a growth rate of 25.1% over the last five years, improving to 61.3% averaged over the last three years and last year grew at an attention-grabbing 98.1%. TD operates with a net margin of just over 35% and a return on ROE of 26.3%.
Commodity Problems
Measured by market capitalization of $31.9 billion, the Bank of Montreal (NYSE:BMO) is Canada's fourth largest bank. BMO generates not quite $10 billion in sales from $310 billion in assets. BMO is the oldest bank in Canada and has 1,000 branches there. It also runs another 215 in the U.S. under the Harris Bank banner and has operations in nine other countries as well. Like most other banks, BMO strives to be a one-stop-shop for everyone's banking needs including retail and commercial banking, wealth management and other financial services.
BMO has been very successful in differentiating itself from its peer group by building an impressive "bulge bracket" investment banking business. BMO's investment banking business accounts for 27% of its revenue and 32% of its profits. The unfortunate flip-side of BMO has been its commodity trading. The latest quarter's losses amounted to $149 million bring the total to $829 million as the bank pares its exposure to natural gas. The whole derivative portfolio is now worth roughly $11.5 billion from its peak at $22.7 billion. The management at BMO thinks the worst is now behind it.
BMO's financial results are a mixed bag. While its revenue growth has hovered between 1.5% last year to 3.1% when averaged over three years, its earnings growth have declined slightly from averaging 14.4% over the last three years to 11% last year. Although BMO's return on equity stands at 18.4%, the bank operates with a net margin of 26.7%. Once the trading losses are history, BMO can do better.
Lessons Learned
The last three years have seen BMO appreciate about 60%, TD roughly 100% and Royal Bank around 120%. It seems that banks do better when they stick to banking.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
The old joke on Wall Street is that there is no such thing as a domestic bank - they're all international these days. Canada is home to at least half a dozen world class banks and we're going to take a look at three of them.
Huge Non-Interest Income
Royal Bank of Canada (NYSE:RY) is Canada's largest bank with assets of C$475 billion (all figures in the article given in Canadian dollars unless otherwise stated), 1,400 branches and 14 million customers in North America and 30 other countries. Royal Bank generates over $20.6 billion in revenue and enjoys a market capitalization of $66.6 billion.
The good news with Royal Bank is that of its $20.6 million in revenue, 63% of it comes from non-interest income. That is a big deal because it reduces the bank's exposure to interest rate risk. In comparison, other Canadian banks earn about 55% of their revenue in non-interest income and Royal's U.S. peer group earns roughly 48%.
Royal Bank's financial results are testament to its success. Five years ago, Royal's revenue averaged -8.4% in growth. The bank has since turned that around to average 6.8% over the last three years and 7.4% last year. Earnings have seen a similar improvement with a year-over-year growth rate of 38.6%. Royal operates with a net margin of almost 23% and posts an impressive 23.5% return on equity (ROE). (For greater insight, see Analyzing A Bank's Financial Statements.)
Expanding South of the Border
Toronto Dominion Bank (NYSE:TD) is Canada's third largest bank as measured by its market capitalization of just over $48.5 billion. TD generates roughly $13.1 billion in revenue from $390 billion in assets with about 55% of that revenue coming from its retail and commercial banking operations. TD tries to differentiate itself by focusing on customer service and convenience such as extended hours at its branches.
You can't argue with TD's results. Revenue growth, averaging a growth rate of 3.9% over the previous five years has improved to 9.3% when averaged over the last three years and last year saw a growth rate of 10.2%. Growth in TD's earnings has been even more impressive averaging a growth rate of 25.1% over the last five years, improving to 61.3% averaged over the last three years and last year grew at an attention-grabbing 98.1%. TD operates with a net margin of just over 35% and a return on ROE of 26.3%.
Commodity Problems
Measured by market capitalization of $31.9 billion, the Bank of Montreal (NYSE:BMO) is Canada's fourth largest bank. BMO generates not quite $10 billion in sales from $310 billion in assets. BMO is the oldest bank in Canada and has 1,000 branches there. It also runs another 215 in the U.S. under the Harris Bank banner and has operations in nine other countries as well. Like most other banks, BMO strives to be a one-stop-shop for everyone's banking needs including retail and commercial banking, wealth management and other financial services.
BMO has been very successful in differentiating itself from its peer group by building an impressive "bulge bracket" investment banking business. BMO's investment banking business accounts for 27% of its revenue and 32% of its profits. The unfortunate flip-side of BMO has been its commodity trading. The latest quarter's losses amounted to $149 million bring the total to $829 million as the bank pares its exposure to natural gas. The whole derivative portfolio is now worth roughly $11.5 billion from its peak at $22.7 billion. The management at BMO thinks the worst is now behind it.
BMO's financial results are a mixed bag. While its revenue growth has hovered between 1.5% last year to 3.1% when averaged over three years, its earnings growth have declined slightly from averaging 14.4% over the last three years to 11% last year. Although BMO's return on equity stands at 18.4%, the bank operates with a net margin of 26.7%. Once the trading losses are history, BMO can do better.
Lessons Learned
The last three years have seen BMO appreciate about 60%, TD roughly 100% and Royal Bank around 120%. It seems that banks do better when they stick to banking.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
by
Dean Lundell
Dean Lundell is the former vice president of Merrill Lynch Capital Markets, a principal of a regional investment bank, an independent futures trader and a licensed commodity trading advisor. Lundell enjoys a contractual relationship with the consulting firm, Greenwich Associates, where he has written material on large corporate and investment banking, interest rate swaps, and foreign exchange and the fixed-ncome Markets. He has also written publications for McGraw-Hill, the Chicago Mercantile Exchange and several financial magazines. Prior to his career on Wall Street, he served with the 82nd Airborne Division in Vietnam.
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