Investing in Canadian Bank Stocks 2023
March 2023 has certainly been an interesting time to be investing in Canadian bank stocks!
Given the quarterly earnings that came out a couple of weeks ago, and then the recent headlines about bank failures, investors have gotten understandably more and more nervous about holding bank stocks as a pillar of their portfolios.
From everything I’ve read and listened to this week, both the Credit Suisse and SVB situations (to say nothing of the random crypto-bank issues) were specific to those two institutions, and there appears to be no additional systemic risk to Canadian banks.
Kyle wrote about all of this all in a recent column for Moneysense magazine, and the main takeaway is that not only would we not worry about my money being safe in a bank – we think this could be a great buying opportunity.
As I write this, Canadian bank stocks are already trending upward, but for a while, all of the negative headlines spooked a few of the day trading-types away from fundamentally excellent companies.
As a whole, Canada’s banks are still down substantially down from their historic highs, and while I see some argument for why their profit margins might be compressed a small amount over the next 3-6 months, I don’t think there is any legitimate reason to be discounting them to the degree at which they are currently valued.
Mike Heroux from Dividend Stocks Rock recently did a free webinar (sign up here so you don’t miss the next one) on his picks for best Canadian bank stocks in 2023. His favourite Canadian bank continues to be National Bank. I would add TD to that recommendation as well. Go ahead and sign up for Mike’s next seminar and ask him about SVB and Credit Suisse vs the Canadian Banks. I guarantee he will answer, as he never ducks a question.
Canadian Banks vs. The Best Dividend Stocks in Canada
Here’s a snapshot of how Canadian bank stocks compare to big companies in other sectors. For more information, read our best Canadian dividend stocks article, or our list of dividend kings in Canada.
5yr Revenue Growth
5yr EPS Growth
5yr Dividend Growth
Bank of Montreal
?????? (Hidden, click for access)
(Hidden, click for access)
How Did Canadian Bank Stocks Do in Q1 2023?
Dividend Stocks Rock produced an excellent Q1 Bank Stocks update video (below). As always Mike walks us through what he looks for in terms of earnings, dividend increases, payout ratios, and long-term prospects. He also addresses the concept of PCL provisions. Finally, in addition to the Big 6 Canadian Bank Stocks, Mike also comments on Equitable Bank near the end.
Canadian Banks are Not SVB or Credit Suisse
Investing can be scary sometimes.
When investing involves banks, there is often an exponentially greater emotional response because often it’s not only your stock exposure at risk – but your chequing account, maybe business account, etc.
Consequently, when phrases like “bank runs” start to be uttered, it can be tempting to run for the exits. Of course, if companies are fundamentally sound, buying in at low valuations is exactly how you beat the market. Anyone can invest with conviction when all the news is good, but it’s the ability to separate the noise from the reality when things aren’t so rosy that generally determines long-term outperformance.
If you Google “Credit Suisse” you’ll see that the bank has had a lot of problems over the last ten years. Frankly, it has been involved with a lot of really bad people/entities – one might even say “shady” endeavors – and it doesn’t shock me that they look the most shaky out of the large “world systemic banks”. But even Credit Suisse appears “to big to fail” now with the Swiss Government stepping in and back-stopping liquidity worries.
When it comes to SVB, it’s a really interesting case study from a geeky economics/business point of view, but what it really boils down to is a ridiculous risk management decision for that particular bank. It was an awful decision to have essentially put all of their “safe assets” – or “tier one liquidity” as we like to say in Canada – in long-term US Treasuries when we were about to enter a raising interest rate environment. When you consider a huge percentage of their depositors (startups and tech companies) are also very sensitive to interest rate hikes, you have the makings of a perfect storm.
Neither of these two banks has much to do with the Canadian banks we’re discussing here. You might say that on the fringes, BMO and TD investors might have some small worries when it comes to recent American acquisitions, but given the strength of the US labour market, as well as the new guarantee by both the Fed and the Biden Government, I wouldn’t worry all that much.
BMO’s Bank of the West acquisition would be the closest connection to the recent headlines, just due to geographical proximity to SVB, as well as having slightly elevated numbers of non-insured deposits vs the major US banks. That said, the US government just implicitly guaranteed all bank deposits, so I’d say that systemic risk is now off the table.
As a major TD investor (added to my position amidst the chaos on Monday – so didn’t get it at the bottom, but I’m happy with my discount) it certainly wouldn’t break my heart to see the $13.4 billion acquisition of First Horizon Corp go quietly into the night. Perhaps at the very least, TD can use this regional banking weakness to renegotiate more advantageous acquisition terms.
On a purely fundamental level, I think it’s worth pointing out that quarterly earnings results from a few weeks revealed that the Canadian banks continue to make a lot of money, and that the major reason that earnings per share numbers weren’t through the roof was something called “PCL”.
PCL is actually pretty important as it stands for Provision for Credit Loss. That money the Canadian banks are setting aside is the exact reason that I’m not nervous about them in terms of their long-term sustainability. A little pain in the short term due to decreased quarterly earnings, is more than worth the heartburn some American bank investors felt this week.
To recap, RBC, CIBC, TD, and National Bank, all substantially beat their quarterly consensus earnings predictions. BMO and Scotiabank both had solid-if-unspectacular quarters as well. The Big 6 all remain very liquid and very well capitalized.
I haven’t noticed any rush within Canada to pull money out – and with FDIC insurance, why would you? That being the case, I don’t see any reason to believe that investing in Canadian bank stocks is any more risky in the long-term than it was a month ago.
Canadian Bank Stocks Performance in 2022
While 2022 wasn’t a banner year for Canadian bank stocks, it could certainly have been worse. Canadian banks continued to produce substantial earnings and churn out dividends. That said here are my main takeaways:
- My main stock recommendations of TX and National Bank did fairly well.
- I also own RBC (didn’t add to it this year) and it continues to prove that it deserves its valuation premium over the rest of the class.
- Bank of Montreal (BMO) surprised me, and I remain unconvinced that they deserve the year they had.
- I’m glad that I stayed away from CIBC and Scotiabank. At some point their valuations will become too juicy to ignore, but for now, I’ll stick with TD and National Bank.
- As a group the banks did better than the broader Canadian index and better than their American counterparts.
- Overall revenues were up substantially. Canadian banks are being quite conservative with their capital on hand.
Investing in The Big Canadian Banks – Overview
Royal Bank of Canada (RBC)
RBC is the reigning king of Canadian banking. Royal Bank of Canada is a Canadian multinational financial services company and the largest bank in Canada by market capitalization. The bank serves over 16 million clients in Canada, the U.S. and 27 other countries.
They are one of North America’s most diversified financial services companies, and provide personal and commercial banking, wealth management, insurance, investor services and capital markets products and services on a global basis.
In summary, they are a dividend/earnings beast with so many ways to make money.
TD Bank (TD)
TD is also a very well-diversified bank that concentrates on Canadian and U.S. retail banking and wealth management. In fact, TD has more branches in the U.S., compared to Canada. That said, they generate more revenue and earnings in Canada. That speaks to the very profitable oligopoly situation in Canada.
TD Bank Group offers a full range of financial products and services to more than 26 million customers worldwide. TD also ranks among the world’s leading online financial services firms, with more than 15 million active online and mobile customers.
U.S. financial giant Charles Scwab (SCHW) purchased TD Ameritrade in 2019, giving TD a 13.5% stake in Schwab. Consequently, with TD you’re getting some very nice U.S. exposure.
Scotiabank is the most International of the Canadian banks. Scotiabank serves more than 26 million clients in Canada, and offers a range of products and services in the U.S., Latin America (excluding Mexico), and in select markets in Europe, Asia and Australia. They have a very robust global and capital markets division that includes lending, deposit, cash management and trade finance solutions and retail automotive financing operations.
While there is great potential in developing markets, they have not always executed with precision in these foreign markets and have generally lagged behind the leaders in recent years.
Scotiabank also owns Tangerine, Canada’s leading online bank.
Bank of Montreal (BMO)
BMO might be considered the most forward-thinking of Canada’s big banks when it comes to introducing cost-cutting options in recent years.
BMO serves more than 12 million customers, with 8 million via Canada operations. They operate in three divisions – personal and commercial banking, capital markets and BMO wealth management. BMO has been aggressively expanding its U.S. footprint through a series of operations.
In Canada they are well positioned as the leading bank with respect to ETF assets under management. They are in second place in Canada, only behind BlackRock, but BMO is gaining ground and closing that gap. They also offer advice-Direct, a digital investment advice and portfolio management platform.
Canadian Imperial Bank of Commerce (CM)
CIBC can often be classified as the also-ran among the big 5 Canadian banks. They have made some missteps and have lagged the other banks with respect to diversifying outside of Canada.
In 2019, Barry Schwartz, chief investment officer of Baskin Wealth Management, offered “They seem to be swinging past the fastballs and missing the easy layups that the other banks get right.” That said, analysts appear to be warming to CIBC’s recent efforts.
CIBC serves 10 million customers and operates Canadian personal and commercial banking, plus wealth management. In the U.S. they offer commercial banking and wealth management. They also have a capital markets division.
Dividend investors love CIBC’s commitment to paying shareholders consistently and just because they aren’t the leading name, doesn’t mean they can’t hold leading value at a certain price point!
National Bank of Canada (NA)
National Bank is a regional bank (Quebec) that has been successfully diversifying. National is a very well-run bank, and has been the top-performing big Canadian bank for 20 years or more. It is the favourite value of Dividend Stocks Rock – our most trusted source for dividend growth information.
National generates 50% of its revenues in Quebec, which it then uses to fund additional growth projects outside of Quebec’s borders. Wealth management is growing at 15% annual over the last 10 years. The bank is also active in the U.S. and emerging markets.
The fact is that National Bank is a bit smaller and more nimble (compared to the big 5) and more responsive as they seek acquisitions. This could lead to outsized gains versus its large market cap banking brethren.
Canadian Bank Stocks are Cheap
A recent Globe and Mail article put it best when they stated:
“Though they have rebounded over the past month, stock prices are down 14 per cent since November. Relatively low valuations, in terms of price-to-book and price-to-earnings ratios, also appear to suggest that stocks are priced for trouble ahead, if not an outright economic contraction.”
The same article went on to reveal:
“At this point, we are wondering if too much negativity has been reflected,” Gabriel Dechaine, an analyst at National Bank Financial, said in a note.
Given the strength of the Canadian labour market, I think the calls for a dramatic long-term recession are overblown. The Canadian banks are doing what they always do and setting aside reserves for a rainy day. This is the kind of cautious move that has generated such strong confidence amongst investors.
I’m also of the opinion that the idea of a complete housing meltdown have been exaggerated. People forget that the vast majority of Canadian homeowners either have fully paid off their mortgage, or locked into a long-term deal over the last couple of historically-low interest years.
Yes, higher interest rates will affect new homeowners, but let’s now blow things out of proportion here. Most middle class Canadians would rather sell an organ than foreclose on the house that they have tied up so much of their identity in.
It’s worth noting that the most current Canadian insolvency numbers are lower than they were in 2019 (pre-pandemic).
With forward P/E ratios 10%+ below their historical averages, and their P/B metrics looking quite attractive as well, now may very well be the time to scoop up these stocks at excellent valuations.
Investing in Canadian Banks: FAQ
Canadian Bank Stock Dividends For the Government?
The federal Liberal government is looking to hit the financials coming and going. First off, they are looking to increase the corporate income tax rate from 15% to 18% on all earnings above $1 billion. It is estimated that collectively it will cost the big banks about $1billion in profits each year.
Also, the big Canadian banks and insurers will be paying a Canada Recovery Dividend. The two programs are slated to begin in 2022-2023 and will run over a four-year period. The rate or amount of the Canada Recovery Dividend will be negotiated over the coming months.
Analysts do not see this as a major hit to the very profitable banks and insurance companies. The taxes are likely already priced into the stocks, as bank analysts already know what’s coming down to the pipe.
It may be best to focus more on the long term growth prospects and those growing dividends that will end up in your pocket.
How Did Canadian Bank Stocks End 2022?
As you can see from the chart above, investors of Canadian bank stocks just wrapped up a banner year. The dividend increases are lovely to see, and stock buybacks are an early Christmas present for shareholders.
Across the board we see relatively low payout ratios – easily able to soak up the proposed government tax increases – and stable dividends look to keep flowing for the foreseeable future.
This comes as no surprise to me as the banks have been paying and growing dividends long before Canada was Canada. That’s one reason why you’ll find Canadian bank stocks in our list of the Best Canadian Dividend Stocks.
Below you can see how the Canadian bank stocks have done vs the TSX 60 Index over the past three years and past ten years respectively. It’s worth noting that the total return represents the capital gains plus dividends.
Once again, big shout out to Mike Heroux at Dividend Stocks Rock for this info. Make sure not to miss out on Mike’s exclusive discount for Million Dollar Journey readers – and then see what Mike’s analysis of the most recent news for Canadian Bank Stocks below.
Investing in Canadian Banks for 2023 – Ignore the Noise
As you can see from the chart above (will be updated throughout 2023), I love the Canadian banks as a group, with National Bank being my choice for the best Canadian Bank stocks to buy in 2023. The solid regional background of National Bank, combined with the smaller market cap give the company the most solid prospects for growth out of the Canadian banks.
The stability of the Canadian bank dividends helps all investors moderate their “animal spirits” when it comes to panic selling, and their track record when it comes to allocating capital for expenditures is second-to-none. This moderate tone will serve bank investors well in 2023 as it promises to be a volatile year.
As we begin 2023, investments in Canadian bank stocks and their commitment to rewarding shareholders with increased dividends and stock buybacks continue to make us look good. Even when big retail giants like Walmart, Target, or Amazon are experiencing awful trading days, the Canadian bank stocks report steady-as-she-goes earnings and dividend raises.
For other investment options, read our best Canadian dividend stocks page, or our list of Canada’s dividend kings and aristocrats.
I've Completed My Million Dollar Journey. Let Me Guide You Through Yours!
Sign up below to get a copy of our free eBook: Can I Retire Yet?
Refresh my memory please, did MDJ have a link to an article where the investor was 100% dividend driven, investing only in the banks, insurance, communications & energy?
Was just checking in on this post. It was suggested that banks deliver 17% from that yield level historically. We’re above 14% already. Wow.
More to come if the fears of inflation and rising rates hang around.
Banking stocks (not just Canadian) seem like a great bet due to their depressed prices and just the heady rise in tech stocks making them out of favour.
A 4% divi yield? what isn’t to love about that.
Thanks for the OSFI tip restricting dividend increases for the banks. I did not know that.