Royal Bank of Canada and Toronto-Dominion Bank were upgraded to buy from neutral at Citi Research as Canada’s biggest banks are expected to be the best creators of shareholder value from 2015 to 2017.
Analyst Stefan Nedialkov noted that Canadian bank stocks delivered a yearly total return of 12% between 2004 and 2014, putting them behind Australia but in front of the Nordic banks.
“Total market returns are well correlated with shareholder value, and we expect the Canadian banks to power ahead in 2015-2017,” he told clients.
Dividend yields in Canada (4.2%-4.6%) are less than those in Australia (4.5%-5.1%) and the Nordics (4.3%-6.4%), but Mr. Nedialkov noted that Canadian banks should still outperform, partly as a result of their higher share-buyback activity and organic capital generation.
He expects CIBC, Bank of Quebec and Bank of Montreal to generate the best overall capital returns in Canada, in addition to among the 15 banks he covers, with total yields in the 6.5%-to-8.5% range, including buybacks.
“After an oil-related derating, Canadian banks screen well versus Nordics and Australian. We feel oil risks to be contained (both 1st and 2nd order),” the analyst said. “The temptation to do M&A is still in full swing but should the banks rein in expensive acquisitions, once we expect them to, buybacks should increase.”