Investing in Canadian Bank Stocks – September 2022 Update

Does investing in Canadian bank stocks for 2022 make sense? Given the less-than-stellar results during the second quarter, resulting in a 10% drop so far this year, investing in Canadian banks isn’t quite as popular a trend as it was last year.  

That said – for those of us in the nest egg-building stage of our lives, the slight miss on earnings per share is a blessing in disguise. The market overreaction means that investing in Canadian bank stocks is now almost as attractive as at any time in the last 10+ years. Price-to-book and forward price-to-earnings are substantially below long term averages.

bmo stock chart

Second quarter results for TD, RBC, BMO, National Bank, CIBC, and Scotiabank can be summed up as:

  • The banks are cautiously setting aside money for loan defaults.  Considering some economic projections this is likely a good idea, but of course that impacts profits in the short term.
  • Scotiabank had the worst investor reaction, although RBC also slightly missed expectations (likely as a result of RBC’s expectations always being fairly high).
  • Canada-based earnings were excellent for the banks, and the Canadian economy as a whole continues to be a bright spot versus the rest of the world.
  • Our National Bank Canadian dividend kings stock pick continues to do well, having yet another very solid quarter.

The main headline from the banks’ quarterly earnings calls was they are proceeding forward at a very cautious pace. By setting aside profits to boost loan loss reserves, the banks are hedging against a really serious market downturn – knowing that they can always choose to disperse that money to shareholders via buybacks and dividend raises if the economic picture begins to look a little more cheery. 

Are Canadian Bank Stocks Downtrending?

While it is a bit of a profit sacrifice in the short term, there is a reason that Canada’s banks have such a stable reputation – and consequently why they have so much hard earned trust.

Owners of Canadian bank stocks know that the big banks operate in a very protective oligopoly here in Canada, and consequently, their wide moat allows them to pass along price increases very efficiently – thus protecting profit margins.

Canadian banks are a safe buy today as much as they were last year and even more so.

Canadian Banks vs. 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.

Name

Ticker

Sector

Dividend Yield

5yr Revenue Growth

5yr EPS Growth

5yr Dividend Growth

Payout Ratio

P/E

Enbridge

ENB.TO

Energy

6.02%

6.37%

73.64%

9.52%

117.23%

23.66

Fortis Inc.

FTS.TO

Utilities

3.60%

6.68%

-0.99%

6.10%

79.85%

22.50

Scotiabank

BNS.TO

Finance

5.49%

3.57%

4.38%

4.56%

46.54%

8.98

CIBC

CM.TO

Finance

5.07%

6.69%

5.52%

4.22%

41.81%

9.28

Bank of Montreal

BMO.TO

Finance

4.31%

5.14%

10.01%

4.51%

36.56%

7.09

TD Bank

TD.TO

Finance

4.17%

4.45%

8.84%

7.91%

40.86%

10.61

Royal Bank

RY.TO

Finance

4.16%

5.67%

9.99%

5.92%

39.02%

10.76

National Bank

NA.TO

Finance

4.02%

8.14%

13.60%

5.43%

31.37%

9.39

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For the latest news on Canadian bank stocks I read 10+ publications pretty regularly, but the #1 source I trust is Mike Heroux. I approached Mike about putting together a special offer for Million Dollar Journey readers and he is now offering 33% off instantly for folks who want to checkout his Dividend Stocks Rock service and one-of-a-kind platform. It is hands down the best dividend advice in Canada – or anywhere else for that matter.

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 (BNS) 

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 2021?

Bank

Dividend Increase

EPS

2017 Dividend

2021 Dividend

2022 Dividend

Payout Ratio

BMO.TO

25.47%

53.28%

$0.88

$1.06

$1.33

36.56%

NA.TO

22.54%

57.29%

$0.56

$0.71

$0.87

31.37%

TD.TO

12.66%

20.06%

$0.55

$0.79

$0.89

40.86%

RY.TO

11.11%

41.39%

$0.83

$1.08

$1.20

39.02%

BNS.TO

11.11%

45.30%

$0.76

$0.90

$1.00

46.54%

CM.TO

10.27%

69.38%

$1.27

$1.46

$1.61

41.81%

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.

canadian bank stocks 2022 graph

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 Bank Stocks – Still a Good Idea

As you can see from the chart above (will be updated throughout 2022), we love the Canadian banks as a group, with National Bank being our favourite pick going forward. 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 solid 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.

As we head into the fall of 2022, the 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.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Dale
1 year ago

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.

Dale

charlie @ doginvestor.com
1 year ago

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.

President Elect D Yaz
1 year ago

Thanks for the OSFI tip restricting dividend increases for the banks. I did not know that.