Earnings that topped expectations, lower loan losses and four dividend hikes – it was a good quarter for Canada’s big banks. But not strong enough to move the stocks higher.

As a group, the bank stocks moved down about a full percentage point from the beginning of earnings season on February 23 to its end, on March 2. To many market watchers, that’s a sign that Canada’s bank stocks have become expensive.

But investors should be wary of adopting the “fully valued Canadian bank stocks” narrative, cautions Robert Sedran, banks analyst at CIBC World Markets. When Sedran appeared on The Street on Friday, he was asked if – as is commonly believed – Canadian banks are more expensive than their peers in the U.S.  His answer:  No.

“The U.S. banks have been on a straight line higher, more or less, since the U.S. election,” he told my guest host Dean Orrico, chief investment officer at Middlefield Capital. Sedran believes U.S. bank stocks have by now largely captured expectations for less onerous regulation, lower taxes and better economic growth. “There is better value to be had in Canada,” he said.

But Canada’s much more difficult operating environment – low interest rates and debt-stretched households – means it may be a while before the Canadian banks trade meaningful higher, he added.

Here’s how the banks fared in Q1. 

First, the winners:

Canadian Imperial Bank of Commerce (CM.TO): CIBC delivered the biggest EPS beat of the quarter – its $2.89 per share was 11.6% richer than the market had expected.  It also unveiled the only unexpected dividend increase in the quarter (the bank has now raised its dividend a remarkable nine of the past 10 quarters).

Loan growth was strong in Canada for CIBC – that’s important, because the bank relies on Canada much more so than its peers.

The big question for CIBC lies south of the border.  Can it find a way to raise its offer for PrivateBancorp of Chicago, and thus obtain the U.S. foothold it so keenly wants?

Bank of Montreal (BMO.TO): BMO’s earnings were also significantly stronger than expected.  A big part of that came from explosive growth – 46 per cent - in BMO’s capital markets business, where trading gains featured prominently.

Most of the banks, in fact, reported strong gains in capital markets and trading.  Does that undercut the so-called “quality”, or repeatability, of these bank earnings? I put that question to Sedran.

“Look, these are real profits,” he said.  Yes, there is always the question of whether strong capital markets performance can be continued, he acknowledged.  But in the current environment, with rates and expectations of economic growth in flux creating lots of opportunity for traders, he believes this won’t be the last quarter of strong capital markets gains this year.

Royal Bank of Canada (RY.TO): Royal topped earnings expectations meaningfully (EPS of $1.87 vs an expected $1.77), raised its dividend and boosted its Common Equity Tier 1 capital ratio by 20 basis points.

Royal also turned in a turnaround quarter in its Canadian retail banking unit, with profit rising 8 per cent. Trading gains were significant, and the bank displayed strong operating leverage – the ability to convert top line revenue gains to bottom line profit growth.

“We are hard pressed to find anything to critique,” said Gabriel Dechaine, an analyst at National Bank Financial.

National Bank of Canada (NA.TO): Sedran framed the question facing National  neatly in a preview note before the earnings parade began.  With the Quebec economy creating more full-time jobs that the rest of Canada combined over the past year, wasn’t it time for National’s domestic retail banking franchise to outperform for a change?  National seems to have seen things the same way.   Profit in domestic retail banking was up 18 per cent, and other segments also turned in strong quarters.

“Pretty much every earnings driver and every segment pointed in the right direction,” Sedran said.

And the loser:

Toronto-Dominion Bank (TD.TO): It’s not right to use the word “loser” for a bank like TD, which has delivered so much growth to shareholders over the years. But its performance in the first quarter was soft compared to others in the group. TD’s earnings came in ahead of expectations and it raised its dividend by more than analysts had expected, but the bank’s performance in both Canadian and U.S. retail banking was soft.  Canadian retail banking profit grew only 2 per cent from a year earlier.  In the U.S., EPS growth was stronger, but net interest margins shrank.

And TD reported the only significant increase in provisions for credit losses, pointing to auto loans and credit cards. PCLs represent a judgement call on the part of the bank – they are a forecast on loans that could go bad, not a declaration of those that already have – and it’s possible TD is just being more conservative than its peers. But in a quarter when most of its peers cut back on their provisions meaningfully, this line stood out.

John Aiken, an analyst at Barclays Capital, cautioned investors not to rush to judgement on the soft TD credit numbers. Auto loans and credit cards had been running at unusually low loan-loss levels for a while, he noted, so an uptick in provisions was not a huge surprise.

“On a core basis, we viewed the results favourably,” he said, “as TD managed to earn its way through the uptick in provisions and brought its capital ratio out of any area of concern.”

Somewhere in the middle:

Bank of Nova Scotia (BNS.TO): Scotia exceeded expectations by only a penny per share – not really a beat at all.  It didn’t get the big boost others did from capital markets and trading, mainly because it has less exposure to that part of the business than its peers do.  That’s a plus in weak market quarters, but a negative in a period like the most recent quarter.

But Scotia posted another strong performance in something that really sets it apart from its peers – international banking. Despite worries about the erosion of the value of the Mexican peso and uncertain growth conditions in some of its key Latin American markets, profit grew an impressive 14 per cent in Scotia’s international segment – that’s even higher when you take currency differences into account, Scotia’s CFO told BNN in an interview.  Loans and deposits also grew.

Scotia’s stock sank by almost 3 per cent on the day those numbers were released – a case of the bank delivering solid results but not living up to high expectations.

That’s something that could become more common for all of Canada’s banks this year.

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