Are Canadian Banks a Better Investment?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Today, I am going to do an “apples to apples” comparison of earnings quality between two large Canadian banks, and two large, successful American banks. In most cases, comparing an internationally sound bank to either Bank of America or Citigroup is going to make the American banks are going to look bad. But if comparisons are made with two well respected banks like Wells Fargo (NYSE: WFC) and U.S. Bancorp (NYSE: USB), the American banks will surely look much better, or will they?
Wells Fargo and U.S. Bank both posted excellent earnings and ratios in 2011. Wells Fargo is this country's 4th largest bank with just over $1.3 billion in assets, and in 2011 was named among the Financial Stability Board's list of 29 global ganks deemed "Too Big to Fail." In 2011, Wells Fargo's earnings were up 27% or about $3.5 billion over 2010, to about $15.1 billion, or $2.82 per share. That provided a return on assets of 1.15%. Wells Fargo easily passed the Federal Reserve's recent stress test, and upped its dividend by 83% to a quarterly $0.22 per share, for a yield of 2.8%.
U.S. Bank is this country's fifth largest bank with about $340 billion in assets. It statistically had the best financial year of any of this country's larger banks in 2011. Its earnings were up by $1.5 billion, or 42% from 2010, to $4.87 billion, or $2.46 per share. It had a 1.53% return on assets in 2011, and again passed the stress test by a comfortable margin. In response, U.S. Bank raised its dividend by 56% to 19.5 cents per quarter for an annual yield of 2.5%, and announced it would buy up to 100 million shares of its own stock.
Obviously, a bank cannot increase its profits thirty- or forty-percent every year. Yet, I doubt either of these top tier banks will increase their profits at all in 2012, as those 2011 numbers were predicated on the backs of steeply reduced provisions for loan losses in 2011 versus 2010. Wells Fargo's provision fell about $8 billion year over year, while U.S. Bank's fell about $2.1 billion year over year. Take away those reduced provisions, which flow directly to pretax profit, and Wells Fargo's profit would have fallen about $3 billion less, net of taxes, than in 2010. U.S. Bank would have essentially had flat year-over-year earnings if it were not for the lower provision.
Let's look north of the border. Bank of Montreal (NYSE: BMO) is the fourth largest bank in Canada by assets, with about $480 billion. A substantial portion of that is in the United States, as it entered America in 2004 with its purchase of Chicago based Harris Bank. After numerous small bank acquisitions, it purchased Milwaukee based Marshall and Ilsley for $4.1 billion in late 2010, giving Bank of Montreal an overall American asset base, consolidated under the Harris Bank brand, of about $100 billion.
In its fiscal 2011, Bank of Montreal reported earnings up by about $450 million from 2010, to about $3.27 billion, or $5.26 per share. How did it get that $450 million? Its provisions for loan losses declined by $190 million year over year. The rest of the improvement was due to an $800 million increase of net interest income, and an almost $700 million boost of non-interest income increase, partially offset by a $1 billion increase in non-interest expense and a higher tax rate. That is a completely sustainable pattern, and as its Harris franchise begins to recover some profitability in 2012, it will further boost earnings.
In its first fiscal quarter of 2012, Bank of Montreal reported earnings of $972 million, up $155 million, or 19% from the same quarter of 2011. The per share number of $1.42 represented an eight percent year over year advance. Revenue, most of it in the form of net interest margin, was up 19%, or $649 million, from the year earlier. Much of that advance was offset by a nearly $500 million increase in non-interest expenses. Bank of Montreal's expense ratio rose to nearly 64%, and getting that ratio down will be almost as important as continuing to grow revenues going forward.
Bank of Montreal's well covered, $2.80 per year dividend provides a yield of 4.7%. That combination of income and potential growth makes Bank of Montreal suitable for all conservative investors.
Canadian Imperial Bank of Commerce (NYSE: CM) is based out of Toronto, and is Canada's fifth largest bank by assets, with about $355 billion. It historically has not had good experiences in its investments in the United States, and paid some $2.5 billion in the middle of last decade for its role in the Enron collapse and scandal. Canadian Imperial dipped its toe back in American waters last year by purchasing a 41% stake in mutual fund company American Century for $854 million.
In 2011 Canadian Imperial reported earnings of $3.08 billion, or $7.31 per share. This was up 19% from the $2.59 billion earned in 2010. There amounted to about a $500 million advance on a year over year basis. The provision for loan losses fell about $200 million in 2011 from 2010's level. The balance, or $300 million, was a combination of improved net interest income (up $235 million), and improved non-interest income (up $120 million), and a dramatically lower tax rate, partially offset by higher non-interest expenses (up $320 million). Canadian Imperial also offers a 4.7% yield via its quarterly dividend.
In the first quarter of its fiscal 2012, Canadian Imperial reported earnings of $835 million, up about 9%, or $72 million from the first quarter of 2011. Leading the revenue gain was a $72 million advance in net interest income. It obtained this earnings increase despite its provision for loan losses increasing by $55 million dollars from the year earlier quarter. Let’s see big American banks do that!
How has it come to this? That is, American banks reaping earnings gains due to balance sheet shifts, whereas Canadian banks grow their earnings by growing their revenues. Well, it is a combination of a healthier economy in Canada, and the lack of the sort of antagonism that has existed recent years among banks, government, and population in the United States. In any event, I believe any of the six largest banks in Canada are better and safer long term income and growth stocks than any American commercial bank with over $200 billion in assets.
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