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What are we looking for?

Valuations for Canadian banks trading on the TSX for possible buying opportunities.

The screen

We used StockCalc’s screener to select major banks trading on the TSX, ranked by market capitalization. We then use StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.

Overview of the techniques used:

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  • Discounted cash flow (DCF value) is a valuation technique where cash flow projections are discounted back to the present to calculate value per share (we use a modified DCF calculation for banks);
  • A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
  • An adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio.

If we have analyst coverage, we use the consensus target price.

More About StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30.

What we found

You can see in the accompanying table the percentage difference between each stocks' recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the models and analyst target data.

Any look at bank profitability (and therefore valuation) must include a discussion on interest rates and their expected direction. When interest rates are higher, banks make more money by taking advantage of the difference between the interest banks pay to customers and the interest the bank can earn (the “spread”). Hikes in interest rates tend to occur in environments in which economic growth is strong and bond yields are rising. In these conditions, consumer and business demands for loans spike, which also augments earnings for banks. Conversely, in a period of weaker economic growth the spread is narrowed, profitability is reduced and the concern over unrecoverable loans increases.

From a valuation perspective, all of the banks look intrinsically undervalued, anywhere from a couple of percentage points (for Canadian Imperial Bank of Commerce) to 18.5-per-cent undervalued for Toronto-Dominion Bank.

Let’s look more closely at TD, which shows the greatest potential upside on our list.

In addition to its retail and wholesale banking operations in Canada and the United States, TD also has a 42-per-cent ownership stake in TD Ameritrade, a discount brokerage recently acquired by Charles Schwab Corp. TD’s U.S. exposure, related to the high rate of COVID-19 cases in that country as well as possible election risk, is weighing on the stock. This is in addition to pressure from low interest rates and the economic outlook, which are affecting all banks.

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TD’s price-to-book ratio is at 1.25 (not shown), which is at the lower end of its range for 2020 and down 35 per cent from its highs of this year. In comparison, Royal Bank of Canada’s P/B ratio is at 1.75, down 21 per cent from this year’s highs.

Laurentian Bank of Canada, the smallest bank on our list by market capitalization, is the only one on the list to have cut its dividend this year – in order to provide “greater flexibility to support its strategic plan and bolster its balance sheet.” Notably, Laurentian’s stock price is down the most on this list over the past 52 weeks.

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Select Canadian Banks

NameTickerMkt. Cap. ($ Mil.)Recent Close ($)StockCalc Val. ($)Diff. (%)DCF Value ($)Price Comps ($)ABV ($)Analyst Tgt. ($)1Y Rtn. (%)Div. Yld. (%)
Royal Bank of CanadaRY-T 138,436.9 97.34106.449.3121.0691.45122.72108.15-5.24.4
Toronto-Dominion BankTD-T 109,487.1 60.4271.5818.587.9076.4588.4968.33-14.65.2
Bank of Nova ScotiaBNS-T 68,058.1 56.1860.858.386.2259.0588.8062.05-21.16.4
Bank of MontrealBMO-T 52,060.8 80.9986.877.3110.8474.14113.2785.35-12.45.2
CIBCCM-T 45,051.4 101.01103.012.0110.9995.62159.50107.94-3.75.8
National Bank of CanadaNA-T 22,340.2 66.5576.1314.490.9864.3783.4871.223.24.3
Canadian Western BankCWB-T 2,376.1 27.2829.337.521.1472.4743.3529.33-14.74.2
Laurentian Bank of Cda.LB-T 1,151.8 26.7130.6814.944.7045.9458.4429.33-36.76.0

StockCalc

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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