Tom Slee's Updates on Canadian Banks: Bank of Montreal and Toronto Dominion BankBank of Montreal (TSX, NYSE: BMO)
Originally recommended on July 27/09 (IWB #2928) at C$51.67, US$47.71. Closed Friday at C$59.53, US$60.22.
As expected, BMO posted a good fourth quarter with earnings of $1.28 a share, well ahead of the $1.22 most analysts were looking for. Canadian consumer banking profits were up $22 million to $420 million and Tier 1 capital increased to 13.45%. The numbers were solid rather than exciting and CEO Bill Downe took a low-key approach during the subsequent conference call when he referred to some nice "tuck-in" acquisitions in the pipeline. It seemed as though everything was comfortably on track.
As a result, investors were thunderstruck 10 days later when Mr. Downe announced that BMO was paying US$4.1 billion in a stock for stock deal to buy Milwaukee-based bank Marshall & Ilsley (M&I). With assets of US$50 billion and 372 branches, M&I is Wisconsin's largest bank and the deal gives BMO exposure to several key business regions including Florida and Arizona. The trouble is that M&I's recent numbers have been gruesome and the bank is expected to lose a further US$0.16 a share in 2011. Even BMO concedes that the acquisition will not add anything to its own bottom line until 2013.
The markets recoiled, especially as BMO also announced that it intends to raise $800 million of additional capital and book a $4.7 billion loss up front to cover future M&I losses. The stock sold off and fell 9%. I am surprised that it didn't drop even further. By the time the dust settles BMO will have issued almost 80 million new shares.
The move raises a big question mark over BMO, a bank that has had mixed success in the United States. Earnings growth is bound to slow and the chances are that the anticipated dividend increase will be postponed until 2012. Moody's has placed BMO under review and is expected to downgrade its ratings because of increased exposure to the troubled U.S. housing market. Down the road M&I may pay off in spades but at this stage in the recovery I would prefer to have relatively defensive banks with steady earnings growth in the portfolio.
TD Bank remains my number one choice but Scotiabank (TSX, NYSE: BNS) now looks more attractive than BMO. I will provide a detailed analysis next time but I am immediately adding BNS, currently trading at C$56.83, US$57.34 to our Recommended List as a Buy with a target of $62.
Action now: BMO becomes a Sell. Investors who bought at lower levels and therefore enjoy an above average yield might prefer to retain part of their positions. Those looking for growth can do better elsewhere and should consider a switch to BNS.
Toronto Dominion Bank (TSX, NYSE: TD)
Originally recommended on Feb. 12/07 (IWB #2706) at C$69.85, US$59.59. Closed Friday at C$76.17, US$76.81.
TD Bank turned in a respectable but spotty fourth quarter. The bank reported adjusted earnings of $1.36 per share versus the $1.46 analysts were expecting. However, most of the shortfall was due to non-recurring project related costs in the Canada Trust division. Credit experience was also a little disappointing but TD is still expected to earn about $6.30 a share this year and more than $7 in 2012. That means the shares are still relatively cheap.
Later, TD announced the acquisition of Chrysler Financial (CF) with its $7.5 billion in auto loans, 10% of which are in Canada and 90% in the U.S. The deal is going to cost TD $6.3 billion in cash and, unlike BMO, the bank intends to pay for it without issuing new stock. I think that this is a big plus for TD and puts it amongst the top five North American auto lenders at a time when the industry is recovering. At the same time, CF's client network will provide opportunities for consumer and corporate loan growth. Most encouraging is that the fact that we should see some early payback. CF is expected to add at least $0.12 a share to the bank's bottom line in 2012. Investors are pleased and TD shares have strengthened.
Action now: TD Bank remains a Buy with a target of $83. I have set a $65 revisit level.
- end Tom Slee
Originally recommended on July 27/09 (IWB #2928) at C$51.67, US$47.71. Closed Friday at C$59.53, US$60.22.
As expected, BMO posted a good fourth quarter with earnings of $1.28 a share, well ahead of the $1.22 most analysts were looking for. Canadian consumer banking profits were up $22 million to $420 million and Tier 1 capital increased to 13.45%. The numbers were solid rather than exciting and CEO Bill Downe took a low-key approach during the subsequent conference call when he referred to some nice "tuck-in" acquisitions in the pipeline. It seemed as though everything was comfortably on track.
As a result, investors were thunderstruck 10 days later when Mr. Downe announced that BMO was paying US$4.1 billion in a stock for stock deal to buy Milwaukee-based bank Marshall & Ilsley (M&I). With assets of US$50 billion and 372 branches, M&I is Wisconsin's largest bank and the deal gives BMO exposure to several key business regions including Florida and Arizona. The trouble is that M&I's recent numbers have been gruesome and the bank is expected to lose a further US$0.16 a share in 2011. Even BMO concedes that the acquisition will not add anything to its own bottom line until 2013.
The markets recoiled, especially as BMO also announced that it intends to raise $800 million of additional capital and book a $4.7 billion loss up front to cover future M&I losses. The stock sold off and fell 9%. I am surprised that it didn't drop even further. By the time the dust settles BMO will have issued almost 80 million new shares.
The move raises a big question mark over BMO, a bank that has had mixed success in the United States. Earnings growth is bound to slow and the chances are that the anticipated dividend increase will be postponed until 2012. Moody's has placed BMO under review and is expected to downgrade its ratings because of increased exposure to the troubled U.S. housing market. Down the road M&I may pay off in spades but at this stage in the recovery I would prefer to have relatively defensive banks with steady earnings growth in the portfolio.
TD Bank remains my number one choice but Scotiabank (TSX, NYSE: BNS) now looks more attractive than BMO. I will provide a detailed analysis next time but I am immediately adding BNS, currently trading at C$56.83, US$57.34 to our Recommended List as a Buy with a target of $62.
Action now: BMO becomes a Sell. Investors who bought at lower levels and therefore enjoy an above average yield might prefer to retain part of their positions. Those looking for growth can do better elsewhere and should consider a switch to BNS.
Toronto Dominion Bank (TSX, NYSE: TD)
Originally recommended on Feb. 12/07 (IWB #2706) at C$69.85, US$59.59. Closed Friday at C$76.17, US$76.81.
TD Bank turned in a respectable but spotty fourth quarter. The bank reported adjusted earnings of $1.36 per share versus the $1.46 analysts were expecting. However, most of the shortfall was due to non-recurring project related costs in the Canada Trust division. Credit experience was also a little disappointing but TD is still expected to earn about $6.30 a share this year and more than $7 in 2012. That means the shares are still relatively cheap.
Later, TD announced the acquisition of Chrysler Financial (CF) with its $7.5 billion in auto loans, 10% of which are in Canada and 90% in the U.S. The deal is going to cost TD $6.3 billion in cash and, unlike BMO, the bank intends to pay for it without issuing new stock. I think that this is a big plus for TD and puts it amongst the top five North American auto lenders at a time when the industry is recovering. At the same time, CF's client network will provide opportunities for consumer and corporate loan growth. Most encouraging is that the fact that we should see some early payback. CF is expected to add at least $0.12 a share to the bank's bottom line in 2012. Investors are pleased and TD shares have strengthened.
Action now: TD Bank remains a Buy with a target of $83. I have set a $65 revisit level.
- end Tom Slee
