Key foreign banks released earnings results in the last two weeks, providing a better understanding of the industry’s near-term prospects. After focusing on the one-time U.S. tax charges in the first half of this year, foreign banks shifted attention to the Fed’s “gradual” rate hike decision.
In the annual Fed symposium in Jackson Hole, WY, Powell said that the “gradual process of normalization” of the key interest rate is appropriate as there is no “elevated risk of overheating.” Powell added that the Fed is ready for “whatever it takes” in case inflation goes out of control “or should crisis threaten again.”
Powell also said that although inflation recently came near 2% there is “no clear sign of an acceleration” higher than the desired level. Powell’s statement has two hawkish points, overheating may negatively weigh more on financial markets than inflation and policymakers should closely watch the measures taken for labor market tightness.
Also, Powell’s comments indicated two more rate hikes this year, which in turn are expected to benefit banks including foreign entities with significant exposure in the United States.
Each of the three foreign banks, Royal Bank of Canada RY, Bank of Montreal BMO and The Bank of Nova Scotia BNS has fundamental differences. However, Royal Bank and Bank of Montreal came up with upbeat third-quarter results, while Bank of Nova Scotia missed the same. In this context, let us now perform a comparative analysis of the leading players in the Foreign Banks industry to pick the best investment option based on their earnings scorecard.
Each of the three foreign banks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Third-Quarter Earnings
Royal Bank posted quarterly earnings of $1.66 per share, beating the Zacks Consensus Estimate of $1.62. This compares to earnings of $1.41 per share a year ago. Over the last four quarters, the company surpassed consensus EPS estimates four times.
Royal Bank reported revenues of $8.54 billion for the quarter ended July 2018, surpassing the Zacks Consensus Estimate by 1.90%. Revenues for the quarter were even better than the year-ago figure of $7.43 billion. The company topped consensus revenue estimates three times over the last four quarters. (Read More)
Bank of Montreal reported quarterly earnings of $1.82 per share, beating the Zacks Consensus Estimate of $1.75. This compares to earnings of $1.53 per share a year ago. Over the last four quarters, the company surpassed consensus EPS estimates three times.
Bank of Montreal posted revenues of $4.51 billion for the quarter ended July 2018, surpassing the Zacks Consensus Estimate by 1.33%. This compares to year-ago revenues of $4.13 billion. The company topped consensus revenue estimates four times over the last four quarters. (Read More)
Bank of Nova Scotia came up with quarterly earnings of $1.36 per share, missing the Zacks Consensus Estimate of $1.37. This compares to earnings of $1.27 per share a year ago. Over the last four quarters, the company surpassed consensus EPS estimates twice.
Bank of Nova Scotia recorded revenues of $5.57 billion for the quarter ended July 2018, missing the Zacks Consensus Estimate by 0.37%. This compares to year-ago revenues of $5.22 billion. The company topped consensus revenue estimates twice over the last four quarters. (Read More)
Price Performance
In the last three months, Royal Bank has outperformed the broader industry with an average gain of 7.8% compared with 1.9% decrease for the latter. Although, Bank of Montreal and Bank of Nova Scotia have advanced 7.3% and 0.5%, respectively, in the last three months, both companies have underperformed Royal Bank. So, Royal Bank is a clear winner on this count.
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Earnings History and Estimate Revisions
All the three major foreign banks delivered positive surprises in each of the last four quarters. Royal Bank, Bank of Montreal and Bank of Nova Scotia posted an average positive earnings surprise of 4.3%, 1.9% and 1.7%, respectively.
In the last 90 days, Royal Bank’s current-quarter estimates increased by a cent to $6.55 per share. Bank of Montreal’s current-quarter estimates declined from $6.93 to $6.95, also Bank of Nova Scotia’s current-quarter estimates fell 5 cents to $5.43 last month. Royal Bank holds an edge over the other two companies with respect to both earnings history and estimate revisions.
Valuation
Compared with the S&P 500, the industry is clearly undervalued. This implies that the industry has upside potential for the near future. The industry has an average trailing 12-month P/B ratio — which is the best multiple for valuing banks because of large variations in their earnings results from one quarter to the next — of 1.35, which is below the S&P 500’s average of 4.1. Hence, it may not be a good idea to abstain from stocks belonging to this industry.
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Moreover, coming to the three stocks under consideration, with a P/B ratio of 1.57 in the last one year, Bank of Nova Scotia is clearly underpriced than both the industry and Royal Bank’s and Bank Of Montreal’s P/B ratio of 2.13 and 1.72, respectively.
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Conclusion
In our comparative analysis, we find that the P/B ratio of Royal Bank is higher than both Bank of Montreal and Bank of Nova Scotia. However, when considering price performance, Royal Bank holds an edge over Bank of Montreal and Bank of Nova Scotia. Moreover, in the third quarter, Royal Bank witnessed considerably better earnings performance than the other two foreign banks.
Additionally, when we take a more comprehensive look at the companies’ previous earnings performance and estimate revisions, Royal Bank is clearly the best stock among the three foreign banks. In this respect, it can be concluded that Royal Bank is clearly a better investment proposition than Bank of Montreal and Bank of Nova Scotia.
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