Stock to bank on: a rating of all major Canadian banks puts BNS and Royal ahead of the pack

Money Digest, August, 1997

Canadian banks continue to look attractive in relation to the general market, relative to historic times and comparable U.S. and U.K. banks.

We recommend overweight positions in Bank of Nova Scotia, Royal Bank, and Toronto Dominion Bank as we believe these banks are likely to provide better earnings growth in the future relative to other banks in high ROE businesses.

Stock selections

Bank of Nova Scotia

* Remains our top pick leader cost-control while maintaining very sizable cushions and reserves.

* Increasing its focus on international expansion with recent acquisitions in Peru and Argentina.

* A consistent bank, it carries a top rating of strong buy. Our three-year target is $80.00.

Royal Bank

* Is achieving excellent results in its wealth management initiatives and received our top score on the quarterly report card.

* Dominates in ROE and net income growth year-over-year, which we see continuing.

* The only bank to boost its quarterly dividend this quarter. Royal carries a strong buy recommendation, with a three-year target of $84.00.

Toronto Dominion Bank

* Continues to perform on the mutual fund growth side with 29% growth in the first half of the year.

* Combined Waterhouse and Green Line contributions now position it as the bank with the highest feebased revenues as a percentage of total revenues.

* Expenses slipped this quarter due to the goodwill write-off of its Pont Securities acquisition.

* We expect further securities gains in the second half of the year. TD carries a buy recommendation with a three-year target of $55.00.

Bank of Montreal

* With negative net impaired loans, BMO will likely lower loan loss provisions in the third quarter.

* Its first half results carried LDC bond sales, which comprised 12% of bank net income, higher than the corporate and investment bank's net contribution. BMO is rated a hold. Our three-year target is $69.00.

CIBC

* Its second quarter was weaker due to lower trading revenues as well as lower personal and commercial bank net income.

* CIBC will list on the NYSE this year. This is logical as it pursues additional U.S. equities expertise. We rank CIBC a hold with a three-year target of $43.00.

National Bank

* Provided good capital market revenues this quarter as well as higher securities gains.

* Net impaired loans remained high at over two-times the other banks' average. We remain concerned with credit quality and the impact on future loan loss provisions.

* Its securities operations may contribute as much as one-third of total bank net income this year. National Bank has a reduce rank with a three-year target of $22.00.

CT Financial Services

* Actively ensuring its operations focus on the individual client and as such has sold its pension and custody business to CIBC Mellon and introduced more retail brokerage initiatives.

* Continues with heavy excess cash and capital which are negatively impacting its earnings and ROE in the short term. CFS carries a hold rating with a three-year target of $40.00.

Canadian Western Bank

* While its residential mortgage book is shrinking, CWB has added good asset growth in commercial real estate and industrial loans.

* A low effective tax rate continues with its tax loss carryforwards. CWB carries a hold ranking with a three-year target of $22.00.

Laurentian Bank

* Laurentian Bank is hard at work shifting from transactions to sales and incurring training and technology costs as a result. Impaired loans remain high.

* Its re-engineering efforts are prudent but cost-control and impaired loans should improve. Rumours continue about LB being for sale. From a fundamental view, we rank it a reduce with a three-year target of $30.00.

National Trustco

* Heavy securities gains in the first half of the year were paid out as an extra dividend to shareholders June 25, 1997 at $0.40 per share.

* Without gains, core operations were much lower as NT is in the first year of a two-to-three year turn-around. We currently rank NT a reduce with a three-year target of $25.00.