Investing in Canadian Bank Stocks 2024

With Canada’s big banks all reporting Q4 earnings this week, we thought we’d take a look at investing in Canadian bank stocks in 2024.

Canadian bank stocks have been great long-term investments, but with interest rates going up, the banks are having to set aside more and more money for possible defaults. These pots of “just-in-case” money are called Provisions for Credit Losses (PCLs) and while they are a big part of what makes Canadian banks so stable, they also take a chunk out of the bottom line.

With all of the banks announcing layoffs in late 2023, it’s clear that business isn’t exactly booming. From an investment standpoint though, it’s likely a positive that cost-cutting is at the forefront of management’s minds at the moment.

Mike Heroux is the analyst I personally put at the top of my “must read” list. He also created the chart above. Click below to see which banks Mike thinks will outperform going forward.

Canadian bank stocks 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 6 months, I don’t think there is any legitimate reason to be discounting them to the degree at which they are currently valued.

While high interest rates have really stretched Canadians, we have not seen any sort of historically high default numbers. In fact, it might surprise a lot of people to learn that current mortgage delinquencies (defined as a mortgage payment that is 90 days overdue) are substantially lower today than they were in 2019 (pre-pandemic). While consumer and business insolvencies have risen up to 2019 levels, they are by no means breaking records. 

Certainly there is reason for concern, but I’d argue that there is substantial evidence that the Bank of Canada will begin cutting rates in 2024 – and it will be sooner than most people think.  That will send investors back to bank stocks as profit margins rise, and competition from high GIC rates fades.  

I continue to believe that my Canadian dividend king pick of National Bank remains the best bet going forward out of the Big 6 Canadian Bank Stocks. While it is only up about 3% YTD after the latest sell off, it also has a nice 4.4% yield, while offering the lowest current payout ratio amongst the big banks. Its regional strength in Quebec leaves it less exposed to mortgage delinquencies as well.

Friday’s latest earnings report was another strong showing for National Bank as they outperformed consensus estimates and showed that they are a strong company in a wide variety of macroeconomic climates.

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.

Q4 2023 Canadian Bank Stocks Earnings

The Q4 earnings season was a mixed bag for Canadian Bank Stocks. RBC again surprised to the upside and showed why it’s best in class. As I mentioned above, National Bank was a big winner, while CIBC also was a slight positive surprise.

Meanwhile, Scotiabank severely underperformed expectations (which had already lowered). This bank has been underperforming for a long time now, and I see no evidence that better days are in the immediate future. 

BMO and TD essentially performed in line with expectations and as the two Canadian banks with the most exposure to the USA, I would argue they are a great way to get exposure to that economy.

All six of Canada’s major banks hit on two major themes in their quarterly earnings press conference:

1) High interest rates are adding some stress to Canadians’ budgets. Consequently, they are having to set aside more cash for inevitable defaults, bankruptcies, and consumer insolvencies. BUT – that said – there hasn’t been an abnormal rush of people not being able to make mortgage payments or collapsing under a pile of debt. If high interest rates continue another twelve months, these numbers will no doubt increase, but for now, the overall risk to Canadian banks appears to be exaggerated.

2) The banks are paying close attention to keeping costs low, and all six will be reducing the size of their payroll. As an investor, I like to see this focus (while obviously empathizing with folks who lose their job – wishing them all the best).

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 (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 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, there are great reasons to love and trust Canadian bank stocks for the long term. 

The stability of 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 over the rest of 2023 and into 2024. With all the negative news in 2023, the current entry prices for Canadian bank stocks represent one of the very few “deals” that I can see in the market right now.

The unique regional background of National Bank, combined with a smaller market cap, gives the company the most solid prospects for growth out of the Canadian banks.

RBC has simply proven year in and year out to be worthy of their “best in class” status. The sheer scale and diversity of their revenues continue to make them one of the safest stocks in the world from my point of view.

TD is my final pick for Canadian bank stocks. It has been a strong second banana to RBC for many years, and I like their exposure to the dynamic American market, as well as their market share in the Canadian banking oligopoly.

At the end of the day, nothing that has happened in the last ten years has done anything to shake my faith in Canadian bank stocks. They operate in a protected oligopical environment, benefit from massive barriers to entry, are well run, and profit off of Canadians’ collective indifference to fees and costs.

With Canada’s working population being juiced by aggressive immigration policies, the only real question is which Canadian bank stocks will reward their shareholders with outsized returns (instead of merely solid earnings growth).For other investment options, read our best Canadian dividend stocks page, or our list of Canada’s dividend kings and aristocrats.