The Canadian banks have taken a dip after posting impressive rallies last year. This recent weakness is a fantastic buying opportunity for Canadian investors looking to fortify their portfolios with a solid core holding.
In this article, I’m going to compare the largest Big Five bank, Royal Bank of Canada (TSX:RY)(NYSE:RY), to the smallest and cheapest Big Five bank, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), to see which offers the most value today.
Royal Bank of Canada
Shares of RBC are down 4.5% from the all-time high, and it appears that shares are starting to pick up positive momentum again. The recent sell-off in bank stocks was partially because of the general public’s fears of a Canadian housing market collapse.
The bank owns approximately $246 billion in Canadian residential mortgages, which may seem alarming, but about 48% of its mortgages are insured from a Canadian housing collapse. It’s also worth noting that the mortgages in RBC’s portfolio are of high quality in comparison to alternative mortgage lenders, which spread fear about the entire Canadian financial sector earlier in the year.
RBC delivered solid Q2 2017 results which saw strength in its wealth management and capital markets segments. Revenue clocked in at $10.31 billion, up 8.2% year over year, and net income jumped to $2.81 billion, up over 9.3% year over year. Going forward, the management team is setting its sights on the U.S. investment banking business, which is a great place to grow, especially considering the U.S. economy is supposed to strengthen once Trump delivers on his promises.
Shares currently trade at a 12.89 price-to-earnings multiple, a 2.1 price-to-book multiple, and a 4.4 price-to-cash flow multiple. When compared to historical averages, shares appear to be fairly valued, so investors may want to consider picking up shares of this behemoth for the solid dividend, which currently yields 3.67%.
Canadian Imperial Bank of Commerce
Shares of CIBC are down nearly 10% from the 52-week high, but, like RBC, shares appear to be heading back into positive territory. CIBC got hit harder than RBC because it has larger domestic exposure and is, therefore, more vulnerable if a violent Canadian housing correction occurs.
CIBC trades at a huge discount to RBC because of its lack of international diversification, which hasn’t been addressed until recently with the acquisition of PrivateBancorp and the smaller Geneva Advisors deal which followed shortly after. These deals are not expected to be accretive to earnings until 2020, but in the meantime, more tuck-in U.S. wealth management acquisitions can be expected in the coming months.
Shares currently trade at a 9.01 price-to-earnings multiple and a 1.8 price-to-book multiple, both of which are lower than the company’s five-year historical average multiples of 10.8, and 2.1, respectively. Shares of CIBC are really cheap right now, and I believe the valuation gap between CIBC and RBC will shrink over the next five years as CIBC continues to beef up its U.S. business.
Better buy?
Although the general public wasn’t a fan of CIBC’s PrivateBancorp deal, I think it’s a great move that will pay off in the long term. CIBC is a much cheaper stock, and I don’t think it deserves to be trading at such a huge discount to historical averages since the company is heading in the right direction. CIBC also has a larger yield at 4.69% — over 1% more than that of RBC.
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