High interest rates tend to boost net interest margin (NIM) for banks; subsequently, they put consumers and businesses under pressure. So, rising interest rates initially boost bank earnings by boosting NIM. Later, they hurt bank earnings as the banks have to provision for credit losses (PCL). Over the course of 2024, the banks will face higher levels of delinquency and writedown. Big banks have already boosted their allowance for credit losses (the money they have put aside for loans which could not be repaid). In fact, all of the Big Banks except CIBC reached their 3-year maximum ACL level in Q3, 2024. Big banks can handle these losses, but they would have difficulty growing their earnings. Some analysts are worried that when rates are high, people's expectations for getting a return on their money have been reset, and when rates come down, the banks will have to compete for deposits more than they used to. Putting all this together the big Canadian banks continue to be good dividend payers but may not offer much capital appreciation over the next few quarters.
Company | Market cap ($B) | Dividend Yield | P/E | P/B | |||
---|---|---|---|---|---|---|---|
$193B | 4.1% | 12.1 | 1.8 | ||||
$145B | 5% | 10.5 | 1.4 | ||||
$85.1B | 6.1% | 10.6 | 1.2 | ||||
$95B | 4.6% | 11.5 | 1.3 | ||||
$63.9B | 5.3% | 10 | 1.3 | ||||
$39B | 3.7% | 11.6 | 1.8 | ||||
Data from Morningstar on March 28, 2024. |
Company | Total annual return | ||||||
---|---|---|---|---|---|---|---|
(1-year) | (5-year) | (10-year) | |||||
10.9 | 9.4 | 9.3 | |||||
8.9 | 6.3 | 7.9 | |||||
10.7 | 4.6 | 4.9 | |||||
16.7 | 9 | 8.9 | |||||
27 | 9.4 | 7.3 | |||||
26 | 16.7 | 12.5 | |||||
Market capitalization and dividend yield are extracted from TMX, while returns are from Morningstar on 31 August 2022. P/E and P/B are from TMX on 2 September 2022. |
Royal Bank of Canada stock (RBC stock) and Toronto-Dominion Bank (TD stock) are the two most significant components of the S&P/TSX Composite Index, with 5.5% and 4.3%, respectively, of the index market cap while Bank of Montreal stock (BMO stock) is the 8th largest TSX stock with 2.7% of the index market cap, as of February 7, 2024. Further, the financial sector is the largest sector in the S&P/TSX Composite Index, with a weight of 31%. In addition to banking stocks, the Canadian financial sector includes Canadian insurance stocks and Canadian wealth management stocks.
Higher interest rates often mean a higher margin on the loans. So initially, when interest rates were rising, earnings from retail banking operations were robust. However, higher interest rates and, more importantly, uncertainty in the market materially reduced corporate deals. This means that investment banking has made little money in 2022 and 2023. Lower asset prices mean lower fees gathered by asset managers.
Therefore, the narrative for diversified banks in 2022 and the first half of 2023 has been a tale of mixed fortunes. While higher income streams emanated from commercial and retail banking, lower earnings were reported in investment banking and asset management sectors. However, the landscape grew notably more challenging in the latter half of 2023 and continues into 2024.
Escalating interest rates have exerted pressure on both consumer and corporate finances. Consequently, Canadian banks were compelled to substantially bolster their provisions for credit losses (PCL) towards the end of 2023. Anticipated delinquencies in 2024 are poised to exacerbate this scenario, translating into elevated PCL and heightened write-downs.
The amplified provisions dented bank earnings in Q4 2023 and Q1 2024 and are anticipated to persist as a headwind throughout 2024. Nonetheless, these challenges have largely been factored into current valuations. While big Canadian banks may face constrained growth prospects in the coming year, their robust dividend yields render them compelling investment opportunities.
Historically, banks have been top TSX performers. Among them, we think CIBC has an attractive valuation as of March 2024.
Thus Canadian bank stocks, as critical components of the TSX index and, more importantly, as essential components of the Canadian economy, are worthy of specific attention. Canadian banks are known for their dependable and growing dividend income.
Net Income | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Average |
---|---|---|---|---|---|---|---|---|---|---|---|---|
RBC | $4,296 M | $3,892 M | $4,095 M | $4,253 M | $3,577 M | $3,882 M | $3,214 M | $3,649 M | $3,900 M | $4,100 M | $3,582 M | $3,858 M |
TD | $3,545 M | $3,781 M | $3,733 M | $3,811 M | $3,214 M | $6,671 M | $1,582 M | $3,351 M | $2,963 M | $2,886 M | $2,824 M | $3,487 M |
Scotiabank | $2,542 M | $2,559 M | $2,740 M | $2,747 M | $2,594 M | $2,093 M | $1,772 M | $2,159 M | $2,212 M | $1,385 M | $2,199 M | $2,273 M |
CIBC | $1,730 M | $1,440 M | $1,869 M | $1,523 M | $1,666 M | $1,185 M | $1,523 M | $1,688 M | $1,430 M | $1,483 M | $1,728 M | $1,570 M |
BMO | $2,275 M | $2,159 M | $2,933 M | $4,756 M | $1,365 M | $4,483 M | $247 M | $1,059 M | $1,454 M | $1,617 M | $1,292 M | $2,149 M |
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Historically, large and diversified banks under the watchful eyes of a single strong regulator make up Canada’s financial system. In comparison, the US financial system historically included many smaller banks supervised by several competing regulators. The system in the US has given rise to more robust securities markets and cheaper banking services. But those cheaper services have encouraged more risk-taking by US banks and frequent episodes of financial instability.
Large and diversified banks discussed here do not just offer chequing accounts, saving accounts, credit cards and GICs. They do foreign exchange operations, domestic money transfers and international money transfers; they offer advice and asset management, and they offer insurance.
Some exchange-traded funds enable one to invest in the Canadian banking sector. Among them, The BMO Equal Weight Banks Index ETF (ZEB), Hamilton Enhanced Canadian Bank ETF (HCAL), Hamilton Canadian Bank Mean Reversion Index ETF (HCA) and Covered Call Canadian Banks (ZWB) are noteworthy. The performance of these funds is charted on this page.
Royal Bank of Canada (RBC) As of April 11, 2024 | Exchange | TSX, NYSE |
Ticker Symbol | RY | |
Stock Price | $167.03 | |
50 Day Avg Vol. | 3.9 million | |
Number of Shares | 1.41 billion | |
Alpha | 0.004 | |
Beta | 0.86 | |
Dividend Growth (5 Year) | 7.1%/year | |
Return on Equity | 15% | |
Return on Assets | 0.8% |
RBC's stock has demonstrated exceptional performance in recent history, boasting an annualized 10-year total return of 9%, which surpasses the 7.3% annualized 10-year total return of the TSX index (As of April 17, 2024). RBC’s adjusted earnings per share (EPS) were $3.26/share in Q3, 2024. As Canada's largest financial services institution by market capitalization, RBC traces its roots back to 1864 when it was founded in Halifax as 'the Merchants Bank of Halifax.'
Throughout the latter part of the 19th century, the Merchants Bank of Halifax embarked on a strategic expansion across the maritime provinces. Recognizing the need to extend its reach further, the bank underwent a pivotal name change in 1901, becoming Royal Bank of Canada (RBC), as it sought to establish a presence in western Canada. This expansion involved the establishment of new branches and strategic mergers with other financial institutions.
Today, RBC's corporate headquarters stand proudly at the Royal Bank Plaza, 200 Bay Street, Toronto, while its head office is located at Place Ville-Marie, situated at the intersection of University Street and René-Lévesque Boulevard in Montreal. Renowned as one of the world's systemically important banks, RBC operates not only within Canada but also extends its reach through subsidiaries in the United States and Caribbean countries, offering a range of personal banking services.
Among its subsidiaries, RBC Capital Markets serves as its investment and corporate banking arm, while RBC Dominion Securities operates as its brokerage division. With assets under management exceeding $1 trillion, RBC has solidified its position as a global financial powerhouse.
Notably, in 1998, RBC pursued a merger with the Bank of Montreal, albeit unsuccessfully.
RBC’s modern corporate headquarters building in Toronto's financial district.
RBC boasts of more than 92,000 employees and 17 million clients. At the same time, it has been criticized for being the world's fifth largest fossil fuel financier and the largest financier of fossil fuel development in Canada.
Over the fiscal year 2023, RBC achieved a net income of $14,683 million compared with $15,807 million over 2022. Personal & Commercial Banking accounted for 53% of the bank's income. Capital markets, wealth management, and insurance each contributed 26%, 16%, and 5%, respectively. Over this period, the deteriorating macroeconomic environment made the bank put money aside for possible credit losses (the possibility that some advanced loans likely would not be paid back). This provision was the main factor in lowering the bank's earnings.
Capital Markets Net income was $479 million, amounting to 13% of the quarterly income. This is sharply reduced relative to the prior periods due to loan underwriting markdowns, lower debt and equity origination and lower loan syndication.
Toronto-Dominion Bank (TD) As of April 11, 2024 | Exchange | TSX, NYSE |
Ticker Symbol | TD | |
Stock Price | $81.76 | |
50 Day Avg Vol. | 6.8 million | |
Number of Shares | 1.8 billion | |
Alpha | 0.002 | |
Beta | 0.86 | |
Dividend Growth (5 Year) | 7.8%/year | |
Return on Equity | 7.5% | |
Return on Assets | 0.4% |
TD stock has performed well over recent history as its annualized 10-year total return of 7.5% is greater than the 7.3% 10-year annualized total return of the TSX index (as of 17 April 2024). TD’s adjusted earnings were $2.05/share in Q3, 2024. TD Bank Group is a diversified Canadian financial services company. In 1955, TD emerged from the amalgamation of two venerable institutions: the Bank of Toronto, established in 1855, and the Dominion Bank, which traced its roots back to 1869. Today, TD stands as Canada's preeminent bank in terms of assets under management and holds the status of a systemically important financial institution.
Following the acquisition of Canada Trust in 1996, TD Canada Trust became the flagship brand for personal and commercial banking in Canada under the TD umbrella. Its reach extended beyond Canada's borders with TD Bank NA, a subsidiary operating in the United States.
In 1998, TD pursued a merger with CIBC, albeit without success. 2005 marked TD's entry into the US retail banking sector, which was marked by acquiring Banknorth, a prominent New England bank, for US$3.8 billion. Subsequent strategic moves included the divestment of its US brokerage business to Ameritrade in 2006 and the acquisition of Commerce Bancorp in 2007. In 2010, TD expanded its footprint further with the acquisitions of Riverside National Bank and the South Financial Group.
The expansion trajectory continued in 2011 with the acquisitions of Chrysler Financial Services and MBNA's Canadian credit card business. Notably, TD stood out during the tumultuous period of the Great Recession (2007-2009) as the sole major Canadian bank to maintain its Aaa credit rating.
In February 2022, TD made headlines with the announcement of its intention to acquire First Horizon Bank for $25 per share, amounting to a substantial $13.4 billion. This proposed acquisition, touted as potentially one of the largest US bank deals since the Great Recession, aimed to capitalize on First Horizon's extensive network of 1,560 branches across 22 states, positioning TD for significant growth in the US market.
However, regulatory hurdles delayed the anticipated closure of the deal, ultimately providing TD shareholders with an unexpected reprieve as the bank cited regulatory delays as grounds to cancel the acquisition.
Toronto-Dominion Bank Tower (TD Tower), Toronto, Ontario, Canada
Also, TD sold 1.5% of Charles Schwab Corporation to buy the US brokerage firm Cowen for US$1.3 billion ($39 per share). The Cowan transaction closed in March 2023 and expanded TD’s wholesale banking business.
TD also has more than its fair share of controversy; this includes forcing a customer to refinance their mortgage in 60 days or face foreclosure. Its advisors also encourage customers to make inappropriate investments and increase their credit limit without their consent.
Bank of Nova Scotia (Scotiabank) As of April 11, 2024 | Exchange | TSX, NYSE |
Ticker Symbol | BNS | |
Stock Price | $71.51 | |
50 Day Avg Vol. | 4.1 million | |
Number of Shares | 1.2 billion | |
Alpha | 0.0 | |
Beta | 1.0 | |
Dividend Growth (5 Year) | 4.7%/year | |
Return on Equity | 11% | |
Return on Assets | 0.5% |
Bank of Nova Scotia stock (BNS stock) has not performed particularly well over the recent history compared with other large Canadian banks. As of 17 April 2024, its 10-year annualized total return of 4.2% is significantly lower than 7.3% for the S&P/TSX index. In Q3, 2024, Scotiabank’s adjusted earnings of $1.63/share slightly beat expectations. Scotiabank is a diversified Canadian financial services company headquartered in Toronto. Scotiabank offers personal and commercial banking, wealth management, and corporate and investment banking to 25 million customers worldwide. Scotiabank was established in Halifax in 1832 and relocated to Toronto in 1900.
Scotiabank is one of 15 institutions participating in London gold price fixing. The bank expanded by opening branches in Canada, the US and the Caribbean until the Bank of New Brunswick was acquired in 1913 and Metropolitan Bank in 1914. In 1919, the bank amalgamated with the Bank of Ottawa.
In 1975, the Bank of Nova Scotia adopted Scotiabank as its brand name. Scotiabank is the first Canadian bank which got a licence for trading in Yuan. Scotiabank owns Thanachart Bank, which is the 6th largest bank in Thailand.
Historic Beaux-Arts headquarters of Bank of Nova Scotia (Scotiabank, 1951, architects Mathers and Haldenby) are located at 44 King Street West. TORONTO, CANADA
In 2012, Scotiabank acquired ING Direct Bank of Canada for $3.13 billion and later renamed it Tangerine. In 2015, the Bank of Nova Scotia bought Citigroup’s retail banking in Panama and Costa Rica. In 2019, Scotia sold its branches in Puerto Rico and the US Virgin Islands.
The main lines of business for Scotiabank are:
Bank of Montreal (BMO) As of April 11, 2024 | Exchange | TSX, NYSE |
Ticker Symbol | BMO | |
Stock Price | $125.31 | |
50 Day Avg Vol. | 2.4 million | |
Number of Shares | 725 million | |
Alpha | 0.003 | |
Beta | 1.2 | |
Dividend Growth (5 Year) | 15%/year | |
Return on Equity | 7.8% | |
Return on Assets | 0.4% |
Bank of Montreal stock (BMO stock) has performed particularly well over recent history compared with Canada’s TSX index. In Q3, 2024, BMO’s earnings per share were lower than expected, at $2.64/share. A group of merchants founded Montreal Bank in Montreal in 1817. Operational headquarters and executive offices moved to Toronto in 1977. It is one of the eight largest banks in North America. As the oldest Canadian bank, it had the institution number 001.
In Canada, it does business as BMO Bank of Montreal, while in the US, it does business as BMO Financial Group (which includes the BMO Harris Bank). Its investment and corporate banking division is called BMO Capital Markets. Its wealth management division is branded BMO Nesbitt Burns.
BMO has earned a place in the list of best dividend stocks for not missing any dividend payments since 1829. BMO Financial Group acquired Bank of The West from BNP Paribas for US$16.3 billion. BNP Paribas is the second largest bank in Europe after HSBC. It merged Bank of the West with BMO Harris Bank and doubled its presence in the US market.
Bank of Montreal Main Branch - a Pantheon-like building located on Place d'Armes in Old Montreal. This building is the centrepiece of BMO’s headquarters. Bank of Montreal is the oldest bank in Canada, founded in 1817. Montreal, Canada.
In 1822, Montreal Bank changed its name to Bank of Montreal and went public. In 1824, BMO was expelled from the Ontario market, but it returned in 1838 by purchasing the Bank of the People. The operational headquarters of the bank moved to the First Canadian Place on Bay Street in Toronto in 1977 due to political instability in Quebec.
Harris Bank was acquired in 1984 and later rebranded as BMO Harris Bank. In 1987, BMO acquired the stock brokerage Nesbitt, Thomson and Company. BMO was listed on NYSE in 1995. In 1998, the Bank of Montreal and Royal Bank of Canada agreed to merge, but the regulator blocked this merger. In 2000, BMO and RBC joined their merchant payment processor businesses and formed Moneris Solutions.
BMO purchased AIG Life Insurance Company of Canada for $330 million and renamed it BMO Life Assurance Company in 2009. BMO incorporated its subsidiary BMO ChinaCo in China in 2010. BMO acquired Foreign & Colonial Investment Trust and called it BMO Commercial Property Trust in 2019. In 2015, BMO acquired GE Capital's transportation-finance unit.
BMO consists of three divisions:
Canadian Imperial Bank As of April 11, 2024 | Exchange | TSX, NYSE |
Ticker Symbol | CM | |
Stock Price | $81.94 | |
50 Day Avg Vol. | 3.8 million | |
Number of Shares | 932 million | |
Alpha | 0.004 | |
Beta | 1.08 | |
Dividend Growth (5 Year) | 11%/year | |
Return on Equity | 9.8% | |
Return on Assets | 0.6% |
The Canadian Imperial Bank of Commerce is a large, diversified financial services company headquartered at CIBC square in Toronto. It was formed in 1961 from a merger between the Canadian Bank of Commerce and the Imperial Bank of Canada. The Canadian Bank of Commerce was established in 1867, and the Imperial Bank of Canada was incorporated in 1873.
The main lines of business in CIBC are:
CIBC operates in the US, the Caribbean, Asia and the UK. When CIBC was formed in 1961 with 1200 branches, it was the largest Canadian bank. In the 1960s, CIBC installed Canada's first 24-hour cash dispenser (the predecessor to ATM). In 1987, changes to Canadian banking regulations allowed Canadian banks to engage in investment dealerships, insurance and other financial services.
In 1988, CIBC acquired most of Wood Gundy, a reputable underwriter. Later it was merged with CIBC securities to make up CIBC Wood Gundy. It became CIBC Oppenheimer in 1997 and later CIBC World Markets.
In 1998, CIBC and Loblaws created President’s Choice (PC) Financial. This collaboration ended in 2017. As a result, CIBC established a direct bank called Simplii Financial. All financial assets of PC Financial were transferred to Simplii Financial, a CIBC subsidiary.
CIBC planned a merger with Toronto-Dominion bank in 1998. This merger was blocked by Prime Minister Paul Martin, who was the minister of finance at the time. CIBC bought Juniper Financial Corporation in 2001 and sold it to Barclays Bank in 2004. In 2001, Barclays and CIBC combined their Caribbean operations into FirstCaribbean International Bank. In 2006, CIBC bought Barclay's stake and became 92% owner of FirstCaribbean International Bank. In 2011, CIBC rebranded its subsidiary FirstCaribbean International Bank as CIBC FirstCaribbean International Bank.
In 2017, CIBC bought PrivateBancorp for US$3.8 billion and rebranded it as CIBC Bank USA. It has operations in 13 states and is concentrated on the east coast. Occasionally quarrels among members of CIBC management have become public.
CIBC employees have successfully sued CIBC for not paying for their overtime work in contravention of the Canada Labour code. In 2003, the Securities and exchange commission handed an $80 million fine to CIBC for its role in the manipulation of Enron statements. Concerning the Enron case, the SEC also sued three CIBC executives. In 2005, CIBC paid US$2.4 billion to settle a class action suit by a group of pension funds and investment managers related to the Enron collapse.
In 2005, CIBC agreed to pay US$125 million to settle an SEC investigation into illegal actions by CIBC in which CIBC boosted its profits at the expense of long-term mutual fund investors.
National Bank of Canada As of April 11, 2024 | Exchange | TSX, NYSE |
Ticker Symbol | NA | |
Stock Price | $128.73 | |
50 Day Avg Vol. | 1.8 million | |
Number of Shares | 339 million | |
Alpha | 0.01 | |
Beta | 1.1 | |
Dividend Growth (5 Year) | 26%/year | |
Return on Equity | 16% | |
Return on Assets | 0.8% |
National Bank of Canada is headquartered in Montreal, with branches in most provinces. Banque Nationale was created by an act of Quebec’s provincial legislature and was initially founded and controlled by francophones.
During the great depression, Banque Nationale was merged with Banque d’Hochelaga and Banque Canadienne Nationale (BCN) was formed. BCN was behind the first Canadian credit card called Chargex.
During the 1970s, the Provincial Bank of Canada, which was BCN’s rival, expanded by merging with the People’s Bank, the Unity Bank of Canada and the Laurentide Financial Corporation. In 1979, the Canadian National Bank and the Provincial Bank of Canada merged and formed the National Bank of Canada (NA). During the 1980s, it bought two brokerage firms of Lévesque Beaubien and Geoffrion Leclerc.
Since 1994, NA has had branches in the US. In 1999, NA bought the brokerage firm First Marathon and merged it with its subsidiary Lévesque Beaubien Geoffrion Inc to form the National Bank Financial (NBF), its investment banking subsidiary. Putnam Lovell was another investment bank that NA acquired and merged with NBF in 2002.
Later in the 2010s, NA acquired the ABA Bank of Cambodia. National Bank operations are still concentrated mainly in Quebec.
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