January 11, 2008 / 6:46 PM / in 10 years

RBC was top bank in past decade: analyst

TORONTO (Reuters) - Investors looking for future Canadian bank-stock outperformers should consider the winners of the past decade, which include Royal Bank of Canada and Bank of Nova Scotia, an analyst says.

Ten years ago this month, the first of two big Canadian bank-merger proposals was unveiled.

The two planned unions -- Royal Bank with Bank of Montreal, and Canadian Imperial Bank of Commerce with Toronto-Dominion Bank -- gave rise to much political debate and were ultimately killed in late 1998 by the Liberal government of the day.

Since then, half of the Big Six Canadian banks have been able to “get on with life” without mergers by using different strategies, while the other half delivered relatively poor performance, Credit Suisse bank analyst Jim Bantis said in a research report this week.

The three in the latter category -- National Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce -- don’t appear poised to break out of the pack, Bantis said.

“Despite more compelling valuations, near term we are unconvinced that the lower tier performers of the past decade are positioned to outperform due to respective off-balance sheet issues and lagging domestic retail franchises,” Bantis wrote.

Royal, the country’s largest bank, took first place in his scorecard of decade-long performance.

The ranking was based on 10 measures, including growth in share price, dividends and return on equity, and levels of non-recurring charges, acquisition spending and branch expansion.

Toronto-Dominion and Scotiabank tied for second place, followed by National Bank, BMO and finally CIBC.

CIBC’s last-place finish comes partly from above-average charges connected to failed energy trader Enron, and to relatively slow growth in assets and market capitalization over the past decade. CIBC’s market value grew by only 28 percent in that period, Bantis said.

In his view, Royal and Scotiabank are best positioned to emerge “relatively unscathed” from the ongoing credit crisis. Both have made numerous acquisitions outside Canada in recent years, but the pair have avoided anything too large or too risky, Bantis noted.

“Royal Bank achieved its leading performance by investing in and improving its leading domestic retail franchise,” Bantis said.

TD Bank has also created a highly profitable domestic retail bank, but Bantis cited some “trepidation” because of its strategic gamble on the U.S. retail banking market.

TD is in the process of acquiring New Jersey-based Commerce Bancorp in a cash and stock deal that was valued at about $8.5 billion last autumn, but is now worth about $7.8 billion at TD’s recent share price.

And last year, TD spent $3.2 billion to acquire the remaining stake in New England-focused TD Banknorth that it did not already own.

Three Canadian banks -- Royal, TD and Scotiabank -- were among the top 10 in North America by market capitalization in 2007, up from just one Canadian bank in 1997, according to Credit Suisse.

“We have witnessed stunning growth by the Canadian banks during the past decade,” Bantis wrote.

But even so, Royal’s market cap is less than half that of the third-largest U.S. player, JPMorgan Chase, he noted.

The Canadian Bankers Association made a similar point this week to a federal competition-policy review panel. The industry association said that while the Canadian sector is expanding, U.S. and European competitors have ballooned in size due to mergers and acquisitions. The CBA wants Canadian banks to be able to do the same.

Reporting by Lynne Olver; Editing by Rob Wilson

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