I NSTITUTIONAL E Q U I T Y R ESEARCH Robert Sedran, CFA Marco Giurleo, CFA Christopher Bailey Financials I N D U S T R Y P RIMER February 20, 2018 Bank Primer - 2018 Canadian Banking 101 All figures in Canadian dollars, unless otherwise stated. 18-152284 © 2018 CIBC World Markets Corp., the U.S. broker-dealer, and CIBC World Markets Inc., the Canadian broker-dealer (collectively, CIBC World Markets Corp./Inc.) do and seek to do business with companies covered in its research reports. As a result, investors should be aware that CIBC World Markets Corp./Inc. may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For required regulatory disclosures please refer to "Important Disclosures" beginning on page 144. Find CIBC research on Bloomberg, Thomson Reuters, CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 (416) 594-7000 FactSet, Capital IQ and ResearchCentral.cibcwm.com CIBC World Markets Corp., 425 Lexington Avenue, New York, NY 10017 (212)-856-4000 Bank Primer - 2018 - February 20, 2018 Table of Contents Canadian Banks Snapshot .................................................................... 4 Summary Income Statements ............................................................... 5 Common-Sized Income Statements ........................................................ 6 Summary Balance Sheets ..................................................................... 7 Common-Sized Balance Sheets .............................................................. 8 Introduction – Banking 101 – Version VI .................................................... 9 Optimism Around Bank Outlook ......................................................... 11 Section 1 – The Canadian Banking Industry .............................................. 13 Canadian Regulatory Framework ....................................................... 13 Wealth Management Regulation ........................................................ 17 A Short History Of Canadian Banking ................................................... 19 Market Structure & Market Share .................................................... 19 Consolidation History................................................................... 21 Section 2 – Canada In The World ........................................................... 24 Differences Between Canada And The United States ............................... 26 Banking Is More Concentrated In Canada ........................................... 26 Banks Are More Diversified In Canada ............................................... 26 Margins Are Lower In Canada ......................................................... 27 Leverage Is Higher In Canada ......................................................... 28 Canadian Banks Are More Profitable ................................................ 28 Canadian Banks Trade At A Higher P/B ............................................. 28 Canadian Banks Operating In A More Stable Risk… ................................ 29 …And Regulatory Environment ....................................................... 29 The Canadian Mortgage Market ......................................................... 30 Market Structure And Key Players ................................................... 30 Mortgage Insurance ..................................................................... 31 Mortgage Securitization In Canada .................................................. 32 Key Changes To Mortgage Insurance Rules ......................................... 34 B-20 Regulations ........................................................................ 35 Key Differences Between Canadian And U.S. Mortgages ......................... 38 Section 3 – Financial Statement Analysis ................................................. 39 Common-sized Income Statements ..................................................... 40 Reviewing Key Earnings Drivers ......................................................... 40 Lending Net Interest Income .......................................................... 41 Lending Net Interest Margin .......................................................... 42 Capital Markets Related Revenues (CMRR) ......................................... 44 Fee-based Income ...................................................................... 46 Net Securities Gains / (Losses) ....................................................... 47 Provisions For Credit Losses ........................................................... 47 Balance Sheet ................................................................................. 56 2 Bank Primer - 2018 - February 20, 2018 Common-sized Balance Sheets .......................................................... 57 Assets ........................................................................................ 58 Loans ...................................................................................... 58 Liabilities .................................................................................... 63 Deposits ................................................................................... 63 Other Liabilities ......................................................................... 64 Section 4 – Profitability Measures ......................................................... 66 Section 5 – A Review Of Valuation ......................................................... 71 Section 6 – Capital Adequacy ............................................................... 83 Section 7 – Dividend Policy ................................................................. 90 Section 8 – Company Overviews............................................................ 93 Bank of Montreal ........................................................................... 93 Bank of Nova Scotia ....................................................................... 99 CIBC ........................................................................................ 104 National Bank ............................................................................. 108 Royal Bank ................................................................................ 112 TD Bank .................................................................................... 119 Canadian Western Bank ................................................................ 125 Laurentian Bank .......................................................................... 128 Section 9 – Frequently Asked Questions ................................................ 130 Section 10 – Key Terms & Concepts ..................................................... 139 3 4 Bank Primer Canadian Banks Snapshot - Bank of Montreal Scotiabank CIBC National Bank Royal Bank TD Bank CWB Laurentian Bank 2018 Market Capitalization ($mm) 1 $63,363 $92,875 $50,706 $21,085 $146,162 $133,941 $3,398 $2,020 - Total Assets ($mm) $709,580 $915,273 $565,264 $245,827 $1,212,853 $1,278,995 $26,447 $46,683 February 20, 2018 20, February Target Dividend Payout Range 40%-50% 40%-50% 40%-50% 40%-50% 40%-50% 40%-50% 25%-30% 40%-50% Book Value ($mm) $40,114 $55,454 $29,238 $10,700 $67,416 $69,464 $2,196 $1,996 Head Office Toronto, ON Toronto, ON Toronto, ON Montreal, QC Toronto, ON Toronto, ON Edmonton, AB Montreal, QC Chief Executive Officer Darryl White Brian Porter Victor Dodig Louis Vachon David McKay Bharat Masrani Chris Fowler François Desjardins % of Net Income (Avg. L8Q) 39% 40% 63% 41% 49% 45% n/a n/a Average Assets ($mm) $220,852 $318,200 $304,981 $97,665 $408,200 n/a n/a n/a Average Loans & Bas ($mm)2 $218,909 $315,100 $305,527 $97,343 $403,100 $385,300 n/a n/a Residential Mortgages ($mm) $100,238 $192,600 $201,000 $53,679 $235,200 $189,400 $4,064 $18,486 No. of Branches 926 963 1,076 429 1,235 1,128 42 104 CanadianP&C Core F2017 Efficiency Ratio 49.6% 46.1% 49.9% 53.8% 43.8% 42.5% n/a n/a F2017 Net Income Growth 6% 11% 7% 24% 7% 9% n/a n/a % of Net Income (Avg. L8Q) 21% 22% 24% 35% 22% 9% n/a n/a Quarterly Trading Rev (Avg L8Q) $430 $438 $345 $238 $883 $419 n/a Quarterly Advisory Rev (Avg L8Q) $232 $149 $112 $91 $496 $142 n/a Ranking, All Financings (Cda, 2017) 4 6 3 5 1 2 13 Capital MarketsCapital No. Of Employees (FTE) 2,502 2,413 1,314 701 3,970 4,043 n/a F2017 Net Income Growth 5% 16% 7% 13% 11% 13% n/a 18% (7% Insurance, 6% % of Net Income (Avg. L8Q) 17% (4% Insurance) 12% 10% 20% 9% (5% Insurance) n/a n/a Investor & Treasury) $65,541 (+ $123,003 @ AUM ($mm) $429,448 $207,000 $221,143 $634,100 $365,526 Fiera)3 AUA ($mm) $359,773 $403,000 $348,517 $411,817 $929,200 $410,579 IFIC Ranking (mutual funds) 4 8 7 6 11 1 3 5 Wealth & InsuranceWealth & Average Deposits ($mm) $33,281 $22,000 $5,727 $30,087 $90,900 $23,300 F2017 Net Income Growth 18% 16% 25% 27% 19% 8% % of Net Income (Avg. L8Q) 18% 26% 3% 5% < 5% 30% n/a n/a U.S. Commercial United States Specialty Caribbean P&C (City Nature of Business U.S. P&C International P&C U.S. P&C n/a n/a Banking & Wealth Finance & National Included in Average Loans & BAs ($mm) $90,256 $110,300 $28,835 $7,565 $8,900 $185,200 Change in NIM 2017 Y/Y (bps) 12 8 nmf n/a n/a (2) No. of Branches 573 1,761 46 n/a 68 1,270 Deposit Rank in U.S. (2017) 21 n/a 55 n/a n/a 7 International / U.S. P&C InternationalU.S. / F2017 Net Income Growth 0% 15% nmf 80% (1%) 16% Source: Company Reports, IFIC, Bloomberg, SNL Financial, CIBC World Markets Inc. (1) Market Capitalization as