Skip to main content
number cruncher

What are we looking for?

Valuations for the largest Schedule 1 banks trading on the Toronto Stock Exchange.

The screen

Canada’s big banks enjoyed a banner year in 2021, and with interest rates expected to rise, we thought it would be worthwhile to check in on bank valuations. We used StockCalc’s screener to select the top eight TSX-listed bank stocks by market capitalization on the TSX. We then used 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:

  • Discounted cash flow (DCF value) is a valuation technique in which cash flow projections are discounted back to the present to calculate value per share;
  • 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 10-year average price-to-book ratio;
  • If we have analyst coverage, we look at 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,” which offers a 30-day free trial and special pricing for the second month.

What we found

Revisiting bank valuations in a rising rate environment

CompanyTickerMkt. Cap. ($ Mil.)Recent Close ($)StockCalc Val ($)Diff. (%)DCF Value ($)Price Comps ($)ABV ($)Analyst Tgt. ($)1Y Ttl. Rtn. (%)Div. Yld. (%)
Royal Bank of CanadaRY-T 179,799.8 141.75141.900.0189.94129.08140.43145.3035.23.4
Toronto-Dominion BankTD-T 154,845.5 100.14102.152.0120.6699.9494.21103.5539.63.6
Bank of Nova ScotiaBNS-T 94,135.4 91.4993.282.0106.9196.2789.9893.6038.04.4
Bank of MontrealBMO-T 82,437.2 143.11143.650.4205.58130.17130.21157.1048.53.7
CIBCCM-T 64,136.8 156.87162.693.7258.84159.81173.16165.4045.74.1
National Bank of CanadaNA-T 33,275.7 99.75102.192.4176.0083.14102.56108.3041.53.5
Canadian Western BankCWB-T 3,286.7 38.8342.008.131.6549.2045.7843.2731.13.1
Laurentian Bank of CdaLB-T 1,744.1 42.7543.551.812.2141.9155.7547.0035.94.1

Source: StockCalc

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc Valuation column is a weighted calculation derived from our models, and analyst target data if used.

Central banks are signalling interest rates are going up and bond yields are responding. When rates are higher, banks make more money by taking advantage of a greater “spread” – the difference between the interest banks pay to their depositors and the interest the banks earn from loans to customers. In these stronger economic conditions, consumer and business demands for loans spike, which also augments earnings for banks.

Total return for all the banks shown exceeded 30 per cent in 2021. From a valuation perspective, the companies look fairly valued, with all but one being within 5 per cent of its current price. Given how closely the banks are followed, this is not surprising.

(Note on valuation models: For industries such as banking, asset management, real estate and utilities, discounted cash flow is not generally used in calculating valuations. This is largely because of differences having to do with how they use debt, the types of assets held and how income is generated. Adjusted book value method is the dominant valuation technique in analyzing stocks in these industries, followed by comparables.)

Let’s look at a couple of these companies:

Royal Bank of Canada is this country’s largest bank and the fifth largest in North America by market capitalization. In December, it announced a normal course issuer bid to purchase, for cancellation, up to 45 million, or 3 per cent, of its common shares, and a dividend increase of 11 per cent. Our comparables and ABV models are both below RBC’s current price, with the analyst target above. We commonly see the largest banks having a comparables below their current price (their metrics are derived from other banks on the list), and ABV around the current price.

Canadian Western Bank offers business banking targeting small and medium-sized companies, and personal banking services. It has moved from being an Alberta-focused lender into a more geographically diversified bank with about a third of its business now in British Columbia and close to a quarter in Ontario. Canadian Western appears to be the most undervalued on our list given our ABV, comparables and the analyst target are all above the bank’s current price.

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

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

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Report an error

Editorial code of conduct

Tickers mentioned in this story