Is Now The Time To Invest In Canadian Banks?

A mixed picture has emerged from the most recent set of fourth-quarter earnings from Canada’s 6 major banks. Of the big six banks, three missed quarterly earnings expectations, resulting in stock prices falling in the wake of the announcements. One silver lining: banks increased their dividend payout, offering greater incentive to investors sitting on the sidelines.

Here’s an overview of the latest batch of earnings from Canada’s Big Six banks:

The puck dropped on bank earnings season with The Bank of Nova Scotia (Scotiabank)¹, which reported fourth-quarter adjusted earnings that missed estimates. Banks often set aside money to cover potential losses from bad loans – known in the industry as loan loss provisions. The amount Scotiabank has set aside in the most recent quarter has more than doubled to $1.26B.

Known for its domestic Scotiabank brand, income from Canadian retail banking fell 31% from the same quarter last year. Scotiabank also has a footprint in the Caribbean and Latin America and saw net income from its overseas retail and wholesale banking operations fall 13% and 14% respectively. However, Scotiabank upped its dividend by three cents.

Canadian Imperial Bank of Commerce (CIBC)² set aside $541M for loan loss provisions, an increase of 42% from last year’s fourth quarter as earnings beat the expectations of the market. CIBC is planning to cut up to five percent of its staff by the end of the next fiscal year.

Royal Bank of Canada (RBC)³, Canada’s biggest bank by market capitalization, beat profit expectations in its fourth quarter thanks to a strong showing from its capital markets business and a favourable tax adjustment.

Loan loss provisions rose in the latest quarter and profits in its Personal & Commercial banking segment fell 2%. RBC’s quarterly dividend has increased by three cents to $1.38.

Toronto-Dominion Bank (TD)⁴ missed earnings estimates with provisions for credit losses coming in more than analysts expected at $878M. The bank also took a $266M charge related to its plan to shed 3% of staff and reduce its real estate footprint. TD increased its quarterly dividend to $1.01 from 96 cents.

One market expert encouraged by the dividend payout trend was Global X Investments Canada Inc.’s (“Global X”) Research Analyst Brooke Thackray, who appeared on BNN Bloomberg to discuss bank earnings season.

“It’s a positive sign that we’ve seen [CIBC, RBC and TD] actually come out and make an announcement to say let’s increase their dividends,” Thackray told BNN anchor Amber Kanwar.

Click here to view Brooke’s BNN appearance.

Thackray suggests that a higher dividend payout may indicate a level of confidence and stability within the industry.

Bank of Montreal (BMO)⁵ reported fourth-quarter numbers that missed the market’s expectations due to higher costs from a recent U.S. acquisition and a 12% slump in income from its wealth management business. BMO’s loan loss provisions came in lower than expected at $446M. The bank is upping its quarterly dividend by 6% to $1.51.

Winding down earnings season for Canada’s financial institutions, the National Bank of Canada (NA) beat market expectations with profit in the latest quarter rising 17% thanks to stronger income from its financial markets operations.

NA is the nation’s sixth-largest bank and biggest in Quebec.

NA increased its quarterly dividend by 4 cents and is planning to buy back up to 7 million shares (fewer shares in the market may increase the value of the remaining shares).

NA set aside more money to cover potential loan losses – up 32% year-over-year.

When asked by BNN about his outlook and what it would take to move bank stocks next year, Global X’s Thackray reckons that Canada’s banks would get a “boost” from interest rates beginning to come down in 2024.

Amid a mixed picture from the latest batch of earnings, for investors considering this as an opportunity to invest in Canada’s big banks, one way to gain exposure is through the Global X Equal Weight Banks Index ETF (HBNK) (formerly Horizons Equal Weight Banks Index ETF).

Canadian banks have traditionally been a source of stable dividend income for investors in one of the country’s largest sectors. HBNK seeks to replicate, to the extent reasonably possible and net of expenses, the performance of an index of equal-weighted equity securities of diversified Canadian banks.

HBNK’s annual management fee is currently 0% until July 31, 2024. To find out more on HBNK and related ETFs, please visit: www.GlobalX.ca.

Published December 12, 2023

Sources:

¹ BNS Q4: https://scotiabank.investorroom.com/2023-11-28-Scotiabank-reports-fourth-quarter-and-2023-results
About BNS: Corporate Profile (scotiabank.com)

² CIBC Q4: https://cibc.mediaroom.com/2023-11-30-CIBC-announces-fourth-quarter-and-fiscal-2023-results
About CIBC: https://www.cibc.com/en/about-cibc/corporate-profile.html

³ RBC Q4: https://www.rbc.com/newsroom/news/article.html?article=125854
About RBC: https://www.rbc.com/about-rbc.html

⁴ TD Q4: https://td.mediaroom.com/2023-11-30-TD-Bank-Group-Reports-Fourth-Quarter-and-Fiscal-2023-Results
About TD: https://www.td.com/ca/en/about-td

⁵ BMO Q4: https://newsroom.bmo.com/2023-12-01-BMO-Financial-Group-Reports-Fourth-Quarter-and-Fiscal-2023-Results
About BMO: https://www.bmo.com/main/about-bmo/

⁶ NA Q4: https://www.nbc.ca/about-us/news-media/press-release/2023/20231201-NBC-fourth-quarter-results%20.html
About NA: https://www.nbc.ca/about-us.html

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