Geographic diversification can be valuable for stock market investors. For this reason, investors should consider Canadian banks.
Investors may not realize that Canadian banks tend to trade for lower valuations than their U.S. counterparts, and many also have a higher dividend yield.
The following 3 Canadian banks are attractive for income investors.
Royal Bank of Canada (RY)
The Royal Bank of Canada is the largest bank in Canada by market capitalization, and by total assets. RBC offers banking and financial services to customers primarily in Canada and the U.S.
The financial institution operates in four core business units: Personal & Commercial Banking (39% of FY2023 revenue), Wealth Management (31%), Insurance (10%), and Capital Markets (20%). Its revenue mix is roughly 59% Canada, 25% the U.S., and 16% international.
On 8/28/24, RBC reported quarterly revenue growth of 13%. Management put aside a reserve of C$659 million in the form of provision for credit losses (“PCL”) that dragged down net income. Earnings-per-share rose 13% year-over-year.
The bank’s capital position was still solid with a Common Equity Tier 1 ratio at 13.0%, down from 14.1% a year ago.
RBC makes strategic acquisitions to grow its business for the long haul. For example, in September 2022, it announced the completion of its acquisition of Brewin Dolphin, an award-winning wealth-management firm in the U.K., for £1.6 billion.
Subsequently, it acquired HSBC Canada for C$13.5 billion in March 2024. From FY2014-2023, RBC increased its EPS by 5% per year in U.S. dollars. Management targets a medium-term growth rate of about 7%. RY has increased its dividend for 13 consecutive years and currently yields 3.5%.
Canadian Imperial Bank of Commerce (CM)
Canadian Imperial Bank of Commerce is a global financial institution that provides banking and other financial services to individuals, small businesses, corporations, and institutional clients. CIBC was founded in 1961 and is headquartered in Toronto, Canada.
CIBC reported its fiscal Q3 2024 earnings results on 08/29/24. For the quarter, the bank’s revenue climbed 13% year over year. Provision for credit losses was C$483 million, down 34% from a year ago.
The loan loss ratio was 0.29%, down from 0.35% a year ago. And net income came in C$1.8 billion (up 25%). Adjusted net income came in 10% higher at C$1.9 billion. Adjusted earnings per share rose 27% and the adjusted return on equity was 13.4%, down from 13.9% a year ago.
The bank’s capital position remains solid with a Common Equity Tier 1 ratio of 13.3% versus 12.2% a year ago.
From 2014 to 2023, the bank increased its EPS and DPS by 2.6% and 3.9%, respectively, per year in US$. Fiscal 2020 was one of those abnormal years with a pandemic triggering a decline in CIBC’s earnings. For the bank, one key area of growth is its loans and deposits portfolio. Rising loans lead to higher net interest income, which is a key source of CIBC’s revenues. CIBC’s fiscal 2023 deposits and loans and acceptances, respectively, rose 3.7% and 2.2% versus 2022.
For fiscal Q3 2024, deposits and average loans and acceptances were up 5.5% and 2.2%, respectively, year over year. We project an EPS and DPS growth rate of 4.0% through 2029.
CIBC has increased its dividend for 13 years and currently yields 4%.
Toronto-Dominion Bank (TD)
Toronto-Dominion Bank traces its lineage back to 1855 when the Bank of Toronto was founded. It is now a major bank with C$1.8 trillion in assets. The bank produces about C$14 billion in annual net income each year.
TD reported fiscal Q3 2024 earnings results on August 22nd, 2024. For the quarter, TD reported revenue growth of 10% year-over-year to C$14.2 billion with a net loss of C$181 million due primarily to setting aside ~C$3.6 billion or C$2.06 per share as provision for the anti-money-laundering issue. Provision for credit losses (PCL) also rose 40% to C$1.1 billion.
TD’s medium-term goal is to grow adjusted EPS by 7-10% per year. However, the foreign exchange fluctuation between the C$ and US$ will impact the effective growth rate. That said, TD’s EPS performance has been stable in the last decade despite forex volatility.
From 2014 to 2023, the bank increased its EPS by 5.1% per year. We estimate TD can grow its EPS and DPS by 5.0% per year through 2029.
TD normally has a dividend payout ratio of under 50%. The bank’s competitive advantage is its focus on retail banking in Canada and in the U.S. Still, as a leading North American bank, TD stands as one of the strongest banks that can navigate through any economic hardship.
TD stock currently yields 5.1%.
Disclosure: No positions
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Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.