Bank of Montreal and Royal Bank of Canada Report Q4 Results: What They Mean for Canadian Banks

Bank of Montreal (TSX:BMO)(NYSE:BMO) and Royal Bank of Canada (TSX:RY)(NYSE:RY) both report weak capital markets segments, but there are a couple of bright spots in the results.

| More on:
The Motley Fool

Reporting season for the Canadian banks has begun with the Bank of Montreal (TSX: BMO)(NYSE: BMO) reporting its fourth-quarter and full-year fiscal 2014 results earlier this week and Royal Bank of Canada (TSX: RY)(NYSE: RY) reporting its results shortly afterward. The Bank of Montreal reported fourth-quarter net income that was flat relative to last year and Royal Bank reported an 11% increase in fourth-quarter net income, to $2.33 billion.

There were four themes that are worth noting as we prepare for the remainder of the banks’ reports.

Capital markets a drag on earnings

Revenue at BMO Capital Markets increased 2%, while net income decreased 12% versus last year. Respectable revenue growth was seen in Investment and Corporate Banking but was partially offset by lower revenues in Trading. In fact, trading revenue saw a decrease of 21%, hit by a 79% decrease in fixed income trading.

Net income declined due to higher expenses and lower loan recoveries. Capital Markets accounted for 25% of the company’s net income coming into the quarter. This quarter it represented 17%.

Royal Bank also saw weakness in the Capital Markets division. Net income decreased 14% versus last year and 37% versus the prior quarter mainly due to lower investment banking activities, poor trading results and higher provision for credit losses (PCL).

Canadian retail environment mixed and costs rising

Net income at Bank of Montreal’s Canadian Retail division increased 14%, with healthy loan and deposit growth in both Personal Banking and Commercial Banking.

Net income at Royal Bank’s Personal and Commercial Banking segment increased 8% versus last year, with Canadian Banking up 11% but was flat compared to the prior quarter reflecting higher marketing and infrastructure costs.

Wealth management showing strong results

The Bank of Montreal reported that adjusted net income for the Wealth Management segment increased 25% including the F&C acquisition and 6% organically, and assets under management increased 17%, due mostly to market appreciation and new client assets.

Over at Royal Bank, net income in its Wealth Management division increased 41% compared to last year due to capital appreciation, net sales, and lower PCL. Of note is the fact that the bank is closing its international Wealth Management business in the Caribbean.

Strong capital position

The Bank of Montreal and Royal Bank still have strong capital positions, as seen in their reported Basel III Common Equity Tier 1 Ratio of 9.9%.

There are two other unrelated points that deserve a mention as we look forward.

Effects of oil price decline

If oil continues its slide or even stays at current levels, this would have repercussions for the Canadian banking industry. Since the energy sector is such a big part of the Canadian economy, we know that the banks have a significant amount of business with them.

If and when energy companies begin to struggle due to the sharp decline in oil prices, this would translate to increased loan losses. So the quality of bank loans to this sector could be a concern going forward. Furthermore, the banks’ capital markets divisions would suffer as well, as investment and corporate banking revenue would be negatively affected.

Crunching some numbers

Return on equity is declining. Royal Bank’s ROE in fiscal 2014 was 19.3%, down from 19.7 in 2013, and the Bank of Montreal’s ROE was a lackluster 14.4%. Dividend yields are attractive, with Royal Bank at 3.7% and Bank of Montreal at 3.9%. In terms of valuation, Royal Bank trades at a trailing P/E of 14 times and a forward P/E of 13.2 times, and Bank of Montreal trades at 12.6 times trailing and 11.6 times forward P/E.

Looking ahead as the remaining banks report, we should expect those banks with the least exposure to capital markets to outperform. Canadian Imperial Bank of Commerce ranks well on this measure, as the company has taken clear steps to lessen its exposure to this volatile segment and focus more on wealth management.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas does not own shares of any of the companies mentioned in this article.

More on Bank Stocks

money cash dividends
Stocks for Beginners

Is TD Stock the Best Dividend Stock for You?

Shares of TD stock (TSX:TD) plunged on the news of a money laundering probe. But could this mean it's a…

Read more »

Increasing yield
Bank Stocks

Is a Dividend Yield of 6.5% Enough Reason to Buy Bank of Nova Scotia Stock?

Bank of Nova Scotia is up about 14% in the past six months. Are more gains on the way?

Read more »

Dice engraved with the words buy and sell
Stocks for Beginners

TD Stock: Buy, Sell, or Hold?

TD stock (TSX:TD) is under immense scrutiny during its money laundering probe, but this could also mean it is a…

Read more »

path road success business
Bank Stocks

Should You Load Up on TD Bank Stock?

TD Bank stock is down 10% this year, as it faces ongoing money laundering investigations that will mean up to…

Read more »

edit Colleagues chat over ketchup chips
Bank Stocks

Money-Laundering Investigation: Is TD Bank Stock in Trouble?

Some legal challenges faced by publicly traded companies should be perceived as opportunities by investors since they can discount the…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

Is TD Bank Stock a Good Buy Now?

Here’s why TD Bank stock looks even more attractive to buy for the long term after its upbeat second-quarter earnings.

Read more »

consider the options
Bank Stocks

Is TD Bank Stock the Best Bank Stock for You?

TD Bank stock is reflecting a lot of the negative news. It remains a top bank stock trading at attractive…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Prediction: These 2 Canadian Bank Stocks Are Next in Line to Pop

National Bank of Canada (TSX:NA) and another bank stock look ready to roar higher in the second half of 2024.

Read more »