RBC & TD Analysis

MANU ARORA
JONATHAN CADET
EMILIO CASTAGNETTI
VITO PAGLIUCA
OLIVIER SECKINGER
ZOUHEIR SULTANI

Macro Analysis

Industry Overview

this industry provide

financial services to retail
and business clients in
the form of commercial,
industrial and consumer
loans

Commercial banks earn

the majority of their
revenue through the
interest spread between
customer deposits and
lending products

Key Success Variables (Macro)

1.
2.

Overnight Rate
Corporate Profits

3.

Aggregate Household
Debt

4.

Regulation of the
Commercial Banking
Industry

5.

Consumer Confidence
Index

Interest Rates Correlation

Over the five-year

period, the overnight
rate, which is strongly
correlated with interest
rates charged by
commercial banks

demand for personal

loans has remained
elevated over the fiveyear period

Big Six Banks

In 2015, these
commercial banks are
anticipated to hold
90.0% of the industrys
total assets
u However, low interest
rates have
substantially damaged
interest income on
lending products for
the big six in recent
years
u

Big Six Banks

u

To stay competitive
the Big 6 Banks
have been
acquiring smaller
competitors
Acquisitions provide
a means for industry
operators to achieve
economies of scale
and boost profit
margins

Industry Performance

The Canadian economy

emerged relatively
unscathed from the global
financial crisis, to the
benefit of domestic
commercial banks

Due to strict regulatory

requirements

Household Debt

According to the latest

available data from
Statistics Canada,
household debt increased
to 163.3%

according to PWC 60% of

respondents intended to
reduce debt

Only 23% believed they

could accomplish it!

Mounting Regulation

Commercial banks in
Canada will have to
comply with increasing
government regulation
over the five years to
2020, despite their strong
financial positions

Basel III regulation: 8.5%

Big Six target tougher:

9.5%

Benefits
u

Counteract Financial Crises

Boost in reputation on an
international scale
Cons

Profit downfall forecast from

34.6% to 34.1% in 2020.

What Life Cycle is the Industry

in?

Industry Life Cycle

Merger and acquisition

activity has increased

Product groups are well

established and clearly
segmented

There is wholehearted
market acceptance of
commercial banking
services

Market Segmentation

Product Segmentation

Where are the Banks Situated

Client Distribution

Key Success Variables (Micro)

Having a good reputation

Superior financial
management and debt
management

Ability to raise revenue from

additional sources

Economies of scale

Easy access for clients

Basis of CompetitionWho are

the main players?

Internal competition

External competition

High barriers to entry

Technology and systems

Regulation and policy

(Basel III)

Industry assistance

Oil

Another poor performer is RBC which saw a rise in

bad loans to the energy sector due to low oil prices

From the second quarter impaired loans in oil-andgas almost quadrupled to C$183 million (US$140
million) from the previous quarter

Oil

Toronto Dominion

Five Year Stock Chart

Company
Description
TD

Toronto Dominion

Toronto Dominion (TD)

provides:

1.

Retail Banking

2.

Commercial Banking

3.

Wealth Management

4.

Wholesale Banking

Retail Banking

One-stop shop for as many financial services as

possible for individuals

Products Include:

1.

Chequing & Savings Accounts

2.

PLC, PLP, Credit Cards, Mortgages

3.

TFSA, GICs, Mutual Funds, RRSPs, RESPs

Commercial Banking

Similar to retail banking in

terms of products offered

Deals with businesses

Wealth Management

High-level professional
service

Services include:

1.

Financial/Investment
Advice

2.

Retirement/Legal/Estate
Planning

3.

Accounting/Tax services

Wholesale banking

This type of banking will

provide services to other
banks or large corporations

Services include:

1.

Currency conversion

2.

Large trade transactions

Competitive
Advantage
TD

SWOT Analysis

Strengths

One of the largest banks in

Canada

9 consecutive years of best

customer service by J.D.
Power in Canadian retail
banking

Strong track record

Weaknesses

Global exposure is limited

compared to other major
banks

Strong competition makes it

difficult to increase market
share

Reliance on Canadian
economy

Opportunities

Expansion in US market

Investing heavily in their

online banking services

Threats

Increased volatility in the

North American market

Increasing household debts

Fluctuating interest rate

Increasing competition

Porters 5 Forces

Porters Analysis

Threat of new entrants: Very low.

Bargaining Power of Suppliers: fluctuation from

medium to high.

Bargaining Power of Buyers: Medium to high.

Threat of substitutes: Low.

Rivalry among existing firms: High, fierce

competition.

TDs Competitive Advantage

Retail focus

Customer service &

convenience

Anticipating their risks,

eliminating tail risks

Liquidity Management

Revenue & Profit

Analysis
TD

TD Profits

Hikes in issuance of
dividends

Great volume growth

Revenue climbs

TD Profit Growth Strategy

CEOs Masrani Ideology

Shrinking its branch

footprint

Explored the opportunity of

credit cards in depth

Mr. Hockey (Tim Horton)

Revenues

Assets that bring Revenue

The Assets that bring in revenue are as follows

Interest Bearing Deposits: 42, 483, 000, 000$

Securities: 95, 157, 000, 000$

Derivatives: 69, 438, 000, 000$

Residential Mortgages: 212, 373, 000, 000$

Consumer Instalments: 135, 471, 000, 000$

Credit Card: 30, 215, 000, 000$

Business and Government Loans:

167, 529, 000, 000$

Source: Td 2015 annual statement

Canadian Retail & Commercial

Banking

19.68 Billion Dollars of

Revenue came from
Canadian retail banking in
fiscal year 2015 accounting
for 64%

Of that 7.387 was reported as

earning in fiscal year 2015

Slow Growth in the Canadian

Retail sector

U.S. Retail and Commercial

9.425 Billion $ of Revenue

Came from U.S. Retail
banking accounting for
29% of revenue

Of that 2.053$ was reported

as Earning

Future growth of TD will

highly depend on US
growth

Net Interest Margins

Difference between
interest received and
interest paid

Important part of Interest

Revenue

Small Decline is common

for 5 major Canadian
banks due to Macro
Situation

Net Revenue Vs. Interest

Revenue

Td is highly affected by
Macro environment

However they are diversified

Shows revenue growth is not

only driven by interest
income

Very Defensive Stock

Expense Vs. Revenue

Excluding Interest Revenue

Shows how well TD is

handling Overhead Cost

Optimal Ratio is 50%

Mergers &
Acquisitions
TD

Mergers & Acquisitions

Banknorth Group Inc (2004)

for 3.4 Billion$ which was a
U.S. based bank. Helped
rapidly grow TDs presence
in the U.S.

Commerce Bancorp (2007)

for 8.335 Billion$, acquired
461 branches in the U.S.
which had strong customer
service aligned with TDs
competitive advantage

Mergers & Acquisitions

Chrysler Financial
Corporation (2011) for 6.3
Billion$ paid in cash.
Acquired just under 1 million
car loans which easily
translate into TD clients.

Epoch Holding Corp (2013)

for 669.71 Million$ cash. A
U.S. based investment
management corporation
brining in global investing
talent and expertise.

Management
TD

Bharat Masrani

Dr. Bharat B. Masrani

Chief Executive Office

(effective November 1,2004)

Masters in business
administration York University

27 years of banking
experience, holds Chief Risk
Officer and group head of
U.S. Personal and
commercial banking
positions

CEO Goals

Grow market share in underrepresented

geographies in Personal and Business Banking

Grow TD securities by growing the U.S. Presence

Grow the digital space by modernizing technology

infrastructure

7% to 10 % EPS growth over the medium term

Colleen M. Johnston

Chief Financial Officer

Masters in business
administration York
University

Responsibilities: regulatory
financial reporting,
performance
measurement, optimization
of capital allocation

Recently elected as a
Fellow Chartered
Accountant (FCA)

Tier One Capital

TD

Tier One Capital Ratio

Acceptable tier one capital

ratio 8.5% set by Basel
Committee

Canadian banks more

conservative

Tier one capital ratio

(green) 11.3%

Total capital ratio (yellow)

14%

Tier one common equity

ratio (orange) 9.9%

Intrinsic Value
TD

Beta

Five year regression analysis

Relationship of TD & S&P/TSX Index (0.91)

Expected Return

EPS

Dividends

To estimate dividends we looked at how much they

were paying in the past

Once we did that we were able to give our best

estimate on what we think will be paid out in the
future

Dividends per share that was derived is $2.171

Retention Ratio

Payout ratio DPS/EPS year 1

Retention ratio= 1-(2.171/4.81)

b= 54.8649%

Growth Rate

ROE= 13.6%

EPS= $4.81

DPS= $2.171

b= 54.8649%

13.6%=g/54.8649%

g= 7.4616%

Decrease g by 1% to be
conservative

Adjusted g= 6.4616%

DDM

DPS= $2.171

k= 10.257%

g= 6.4616%

Vo= 2.171*(1+6.4616%)/(10.257%-6.4616%)

Vo= $60.8969

Recommendation

TD would be a buy
recommendation

According the constant growth

DDM model TD is undervalued

In addition with declining

economic activity in Canada
financials are seen to be as a
defensive stock

Great stock if you believe in

passive investing

If your more into active

management it is a great stock
to offset some of your risk

Royal Bank of Canada

5 Year Stock Chart

Company
Description
RBC

Royal Bank of Canada

CORPORATE OVERVIEW
PURPOSE:

Help clients thrive and communities prosper

VISION:

To be among the worlds most trusted and successful financial institutions

VALUES

DESCRIPTION

Client First

Earn the right to be their clients first choice

Collaboration

Win as One RBC

Accountability

Take ownership for personal and collective

high performance

Diversity & Inclusion

Embrace diversity for innovation and growth

Integrity

Hold the highest standards to build trust

Business Segments
RBC provides:

Personal & Commercial Banking

Wealth Management

Investor & Treasury Services

Capital Markets

Insurance

Personal & Commercial

Banking

Banking

Credits &
Loans

Investments

Chequing &
Credit Cards
Savings Accounts

TFSAs, RRSPs &

RESPs

Student Banking

Mortgages

Mutual Funds &

GICs

Newcomers to
Canada

Personal & Car

Loans

Stock, Bonds,
ETFs

Online & Mobile

Banking

Home Equity
Loans

Other Investments

Wealth Management

1.

Global & Local Expertise

2.

Personalize Wealth Management Strategies

3.

Implement Customized Solutions

4.

Keep Clients Informed of Progress

5.

Financial & Investment Advice

6.

Estate Planning

7.

Tax Strategies

8.

Business Succession Planning

9.

New Wealth Planning

10.

Wealth Transfer

11.

Retirement Planning

Capital Markets

Products

Services

Commodities

Alternative Assets

Corporate Banking

Asset Based Lending

Debt

Corporate Access

Derivatives

Base Metal Sales & Trading

Equity Markets

Investment Banking

Fixed Income & Currencies

Prime Brokerage

Structured Notes

RBC Mezzanine Finance

Real Estate Capital Partners

Investor & Treasury Services

Global custody

Securities lending & borrowing

Fund administration

Transaction banking

Shareholder services

Treasury services

Global fund platform

Canadian equity execution & subcustody

Fund Sales Intelligence

Alternative investments

Outsourcing

Benefit payments

Reconciliation services

Investment counsellor services

Canadian sub-custody

Trustee services

Risk & investment analytics

Investment finance

Compliance monitoring & reporting

RBCs Insurance Products &

Services
u

RBC offers to protect their clients homes and properties,

vehicles, lives, health, travels, loans, mortgages, and
credits

RBC also uses Guaranteed Investment Funds (GIFs) to

help their customers protect their savings throughout
their lives for their retirements.

Royal Bank is able to protect their business clients by

planning for loss or disability of their enterprise and
insure them for buy/sell agreements, key people, fixed
expense, and their business loans.

In addition, they offer to insure businesses employees

with group benefits insurance at an affordable price.

Competitive
Advantage
RBC

Competitive Advantage

RBC Secure Cloud, Royal

Bank of Canada
introduced the first cloudbased mobile payments
solution in Canada

The convenience of online

and mobile banking for
monitoring account
balances, making deposits
and transferring funds

Commercial banks will find

it necessary to simplify their
user interfaces and
introduce cloud-based
systems

Acquisition of Ally Canada

benefited RBC by growing
its pre-tax income at an
annualized 8.7% over five
years

S.W.O.T Analysis
Strength
Leading market position in Canada
Solid financial fundamentals
High domestic brand recognition
Export of "Canadian Bank" image to
other markets
Growing global wealth management
business
Loyal customer base
Experienced executive management

Opportunities
Export of "Canadian Bank image
to other markets
Global growing wealth
Canadian dollar strength provides
acquisition opportunities in foreign
markets with higher GDP growth

Threats
Weaknesses
Weak US operations with ongoing
losses
Heavy reliance on wholesale funds
High cost brick and mortar infrastructure

Strong Canadian dollar

Adverse impacts foreign operations incomes
Tight credit spreads
Enduring US weak + potential slowdown in
Canadian) economy and housing market
European debt crisis impacts credit markets
Increasing global regulation
High consumer debt levels slow down loan
growth
Flattening yield curve pressures net interest
margins
Higher non-performing loan levels in foreign
target markets

Strategic Goals

CANADA

Be the undisputed leader in financial services

UNITED STATES

Be the preferred partner to corporate, institutional

and high net worth clients and their businesses

GLOBAL

Be a leading financial services partner valued for

our expertise in select global financial centres

Revenue & Profit

Analysis
RBC

Revenues

Revenues from Assets (In Millions)

October 31 2015
Interest-bearing deposits with banks:
Securities Trading:
Securities Available-for-sale:

$22,690
$158,703
$56,805

Loans (Retail):

$348,183

Loans (Wholesale):

$126,069

Derivatives:

$107,860

Shareholder Performance

RBC announced a quarterly dividend increase of $0.02 or 3% to

$0.81 per share

Q1/2016 payout ratio: 50% was in line with our target of 40-50%

Net Interest Margin

Low interest rate environment and competitive
pressures because of the hostile macro
environment
Still diversified in other revenues even if there is
low interest rates

Earnings & Revenues

Mergers &
Acquisitions

City National Corp.

RBC agreed to buy City Corp for $5.4 billion
Biggest takeover ever to expand sales
Expansion into U.S. private and commercial banking
CN Corp. focuses on a show-business clientele

Provided a loan to Frank Sinatra & Arnold Schwarzenegger

City National deepens RBCs penetration in U.S. wealth management and broaden its
geographic exposure

2,100 financial advisors in the United States

Combined U.S.-based client assets of US$336 billion in wealth and asset

management

Strong commitment to communities

Sim Corp. Announcement

u

BlueBay Asset Management (BlueBay), implement Sim Corp.

Dimension.

The system supports the middle and back office operations

across the entire investment book.

BlueBay is able to handle its diverse range of asset classes,

focused on fixed income and currencies, in one system.

It supports the increasing volumes of trades across

derivatives clearing, investment book of record (IBOR), fund
valuation, investment accounting, collateral management,
and data management.

Ally Canada Acquisition

RBC Acquire Ally Canada for $3.7 Billion

Ally Canada provides financial services directly to auto dealers

Also offers consumer financing for individuals through

automobile dealerships

Management
RBC

Board of Directors
u

David I. McKay
President & C.E.O.

Doug Guzman
Group Head, Wealth Management
& Insurance
Mark Hughes
Chief Risk Officer

Bruce Ross
Group Head, Technology and
Operations

Board of Directors

Tier One Capital

RBC

Tier One Capital

Acceptable tier one capital

ratio 8.5% set by Basel
Committee

Canadian banks more

conservative

Tier one capital ratio

(green) 11.3%

Total capital ratio (yellow)

13.4%

Tier one common equity

ratio (orange) 9.9%

Intrinsic Value
RBC

Beta

Five year regression analysis

Relationship of RBC & S&P/TSX Index (0.85)

Beta Adjusted

Beta normally over 0.9 in financial industry

Used 2 year regression to make more realistic

Adjusted Beta (0.905)

Expected Return

EPS

Dividends

To estimate dividends we looked at how much they

were paying in the past

Once we did that we were able to give our best

estimate on what we think will be paid out in the
future

Dividends per share that was derived is $3.259

Retention Ratio

Payout ratio DPS/EPS year 1

Retention ratio= 1-(3.259/6.72)

b= 51.503%

Growth Rate

ROE= 16.9%

EPS= $6.72

DPS= $3.259

b= 51.503%

16.9%=g/51.503%

g= 8.704%

Decrease g by 2% to be
conservative

Adjusted g= 6.704%

DDM

DPS= $3.259

k= 10.58%

g= 6.704%

Vo= 3.259*(1+6.704%)/(10.58%-6.704%)

Vo= $89.7184

Recommendation

RBC would be a definitely buy

recommendation

According the constant growth

DDM model RBC is undervalued

In addition with declining

economic activity in Canada
financials are seen to be as a
defensive stock

Great stock if you believe in

passive investing

If your more into active

management it is a great stock
to offset some of your risk

Conclusion

Future Considerations
Analysis of the oil
industry might incur
different
results/conclusions
u Test different
models/assumptio
ns in DCF to
analyze the
sensitivity
u

Support Slides

DDM 3 Stage
TD & RBC

Reasoning for DDM 3 Stage

Using DDM 3 Stage as alternative because no one

knows for certain if the industry is in the mature
stage

Our group feels that if we arent in the mature stage

the Canadian economy as a whole has potential to
grow at a rather rapid rate when the commodities
pick up again

After it picks up and the economy goes back into

equilibrium that is when the financials industry in
Canada will stabilize and once that happens the
Financial will grow at a modest constant rate

Growth Rate (3 Stage DDM)

Since our company is in the

mature stage our growth
rate for our growth stage
and mature stage are not
to far form each other

We decided to go with
rather modest growth rates

Payout Ratio (3 Stage DDM)

Growth stage payout ratio

= DPS1/EPS1

For mature stage simply

increased payout ratio by a
bit

Did so because company is

approaching if not is
already in mature stage

DDM 3 Stage TD

Intrinsic value $51.903

DDM 3 Stage RBC

Intrinsic value $69.789

KEY FINANCIALS &

EFFECTIVENESS

COMPARABLES

Net Income Comparable

Net income TTM
23,639.70

25,000.00

22,070.02
20,359.12

20,000.00

15,000.00

10,000.00

5,000.00

0.00

9,925.00
7,912.00

7,014.00
4,370.00

3,576.00

2,191.00

1,549.00

2,285.00

Net Margin Comparable

Net margin TTM
25.00%
20.00%

23.01%

21.79%

23.14%
20.73%
18.37%

20.33%

19.22%
17.12%

16.90%

15.00%
10.00%
5.00%
0.00%

11.86%
6.36%

EPS comparable
EPS TTM
10.00

8.89

9.00

7.50

8.00
7.00

6.75

6.59
5.70

6.00
5.00

4.56

4.23

3.57

4.00
3.00
2.00
1.00
0.00

1.78
1.01

1.06

ROA Comparable
ROA TTM
1.20%

1.11%
1.01%

1.00%
0.81%
0.80%
0.60%
0.40%
0.20%
0.00%

0.89%

0.86%
0.74%

0.92%

0.93%
0.76%
0.65%
0.52%

ROE Comparable
ROE TTM
20.00%

18.85%

18.79%

17.20%

18.00%
16.00%
14.00%

13.74%

14.92%
12.96%

12.77%

12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

8.40%

6.94%

8.13%
6.45%

Balance Sheet
Ratios Comparable

Total Debt/Equity Comparable

Total Debt/ Equity
4.00

3.57

3.49

3.50
3.00
2.50
2.00

2.46

2.33
1.97

1.80

1.88

1.69

1.50
1.00
0.50
0.00

0.78
0.25

0.49

Total Loans/Total Assets

Comparable
Total loans/ Total assets
0.70
0.60
0.50

0.64

0.62
0.54

0.52

0.49

0.46
0.41

0.40

0.42

0.36

0.30
0.20
0.10
0.00

No data

No data

Total Loans/Total Deposits

Comparable
Total Loans/Total Deposits
1.00

0.87

0.90
0.80

0.71

0.93
0.81

0.81
0.71

0.75

0.83

0.81

0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00

No data

No data

Reserves/Total Loans
Comparable
Reserves/Total Loans
0.03000
0.0248

0.02500
0.02000

0.0165

0.01500

0.0112

0.01000
0.00500
0.00000

0.0079
0.00408

0.0058

0.0056

0.0056

0.0053
No data

No data

Market Data &

Price Multiples
Comparable

Enterprise Value Comparable

800,000.00

Enterprise value

700,000.00

669,207.12
597,990.05

600,000.00
500,000.00

462,189.70

400,000.00
319,170.81
300,000.00
200,000.00
100,000.00
0.00

242,944.40
181,153.06
83,875.34

50,100.00

29,620.71

41,960.91

30,996.34

P/E Comparable
P/E TTM

18.00

15.69

16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00

12.28
10.29

11.10
9.66

11.09

10.01

9.54
7.20

9.21

8.24

P/E to Growth
PEG
6.00

4.96

5.00
4.00
3.00
2.00
1.00
0.00

2.94

2.92
2.10

1.92

2.91
2.26

1.69

1.62
0.88

0.74

Price/Book value comparable

Price/ Book Value

2.50

2.00

1.96

1.89
1.59

1.50

1.53

1.51

1.38

1.35
1.07

1.00

0.50

0.00

0.75

0.75

0.77

RBC Valuation EV/EBIT

Mature Stage Proof (TD)

Mature Stage Proof (RBC)