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What are we looking for?

A Canadian bank best protected against a Canadian downturn.

The screen

Two key economic indicators for Canada – the monthly trade balance and employment change – were released on Oct. 5, and at first glance the figures look encouraging. The August monthly trade balance was a surplus, $526-million, for the first time since 2016, and the 63,000 jobs added in September were more than double the consensus Reuters Poll estimate of 25,000. Unfortunately, the first glance is deceiving.

Exports actually fell, and the trade balance was a surplus only because imports fell by even more – an indication that demand is slowing. And on the labour front, part-time employment surged while full-time employment fell and hourly wage growth slowed. If the economy is, in fact, slowing, then this would not be the time to pile into stocks and industries with high (and perhaps close to peak) valuation multiples. If we look at the universe of Canadian companies with market caps greater than $1-billion, the health care sector (which includes cannabis companies) has the highest forward next-12-month (NTM) price to earnings ratio of 33.79 (P/E SmartEstimate), while financials have by far the lowest at only 10.37. When we think of Canadian financials, the Big Six immediately come to mind, and we will rank these six lenders based on a few important factors.

  • Beyond NTM SmartEstimate P/E, we also consider NTM SmartEstimate Tier 1 Capital Ratio (ratio of the bank’s core equity capital to risk-weighted assets) and efficiency ratio (measure of a banks' overhead as a percentage of revenue).
  • And in the context of what appears to be the slowing of growth in Canada’s economy, we look at which banks are least exposed to Canada and most exposed to the United States – a rare bright spot at the moment in the world economy – from a revenue perspective.

More about Refinitiv

Refinitiv (, formerly the financial and risk business of Thomson Reuters, is one of the world’s largest providers of financial markets data and infrastructure, serving more than 40,000 institutions in over 190 countries.

What we found

The highest-scoring bank when considering these five factors is Toronto-Dominion Bank. TD is the most exposed to the United States and the least to Canada. It also has the second-highest forecasted capital ratio and the second-lowest forecasted efficiency ratio (a lower number is better, signalling the bank has managed to apply more operational leverage). The question is what will TD do with the excess capital afforded by its high capital ratio (roughly $6-billion)? This level is fuelling speculation the bank is eyeing more acquisitions in the United States, with ETrade Financial Corp. as a potential target.

The second-ranked bank, and the second-most-exposed to the United States, is Bank of Montreal, and it is also the most favoured by analysts. More than 70 per cent of analysts covering BMO have a “buy” recommendation or higher, including Mehmed Rizvanovic from Macquarie – the top analyst in terms of recommendations covering BMO, according to StarMine, an analyst rating provider.

Canadian banks with high U.S. exposure

Rank Company Ticker USA Canada Capital Ratio Ratio P/E
1 Toronto-Dominion Bank TD-T 40% 51% 12.3% 53.2% 11.53
2 Bank of Montreal BMO-T 25% 68% 12.1% 60.6% 11.42
3 Royal Bank of Canada RY-T 23% 61% 11.9% 55.0% 11.72
4 Bank of Nova Scotia BNS-T 5% 52% 11.7% 51.6% 10.09
5 National Bank of Canada NA-T 11% 78% 12.7% 55.0% 10.04
6 Canadian Imperial Bank of Commerce CM-T 7% 83% 12.2% 56.4% 9.39

Source: Refinitiv

Hugh Smith, CFA, MBA, is an investment management specialist at Refinitiv.

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