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number cruncher

In the last quarter, four Canadian banks did deals in excess of $1-billion each.Kevin Van Paassen

What are we looking for?

As Canada's six large banks prepare to report their fiscal first-quarter earnings, we thought we'd take a look at what investors can expect from them in the year ahead.

In 2011, shareholders can expect to see a 15-per-cent gain, which includes dividends, according to an analysis by Canaccord Genuity's Mario Mendonca and Lemar Persaud.

"We would not be surprised to see modest (5- to 6-per-cent) dividend increases from Toronto-Dominion Bank and Bank of Nova Scotia this quarter," they said, and forecast dividend yields at 3.5 to 4 per cent for the six banks as a group in 2011.

Earnings per share will increase at 11 per cent in 2011 and 2012, reflecting the strongest growth since 2007, and return on equity will be stable at about 16 per cent this year, their analysis showed.

What we found

It highlighted the key themes for bank stocks in 2011: an unexpectedly strong recovery in Canadian and U.S. commercial loan growth; dividend increases; a greater-than-expected slowdown in domestic real estate lending and consumer lending; and some flexibility to undertake limited share buybacks because capital ratios are improving.

"National Bank of Canada, Bank of Montreal and the Canadian Imperial Bank of Commerce will likely find themselves with greater capital flexibility than their larger peers," the analysts wrote.

They upgraded their ratings on BMO and National Bank to "buy" from "hold."

Book value for the group of six large banks will increase by 11 per cent in 2011, and that is directly tied to a sharp reduction in leverage, they said. The leverage ratio is likely to drop from 24.3 in 2007 to 20 in 2011.

Canaccord also tracked excess return, defined as the banks' annualized return on equity in the most recent quarter relative to the AA-rated 10-year bank bond yield.

"Importantly, with the rally in banks stocks in the second half of 2009 and during 2010, the group has moved from a 40-per-cent discount to the implied price-to-book ratio to a price-to-book ratio that is almost precisely what the long-term relationship would predict - that is, the current price-to-book ratio sits 2 per cent below the line," they wrote.

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