Blog: Recap of Canadian Bank Earnings
By Jeff Pollock
Last week, Canada’s big banks reported their quarterly results for the period covering February, March, and April 2022.
Overall, the results were good. Just about every bank exceeded Bay Street’s expectations and all but one increased the dividend.
A few themes are worth highlighting.
All the banks are very well capitalized. In other words, if the economy turned south and loan defaults ticked up, the banks all have a strong cushion to weather future losses. Since the financial crisis in 2008, regulators have required global financial institutions to increase their capital buffers so that history does not repeat itself. During the pandemic, the Canada’s banking regulator required dividend hikes to pause.
Aside from TD Bank, which increased its dividend 13% at the end of last year, its Canadian peers all hiked their dividends. Both CIBC and Scotiabank now offer a 4.8% dividend yield, which leads the group. BMO follows at 4.1%, Royal Bank at 3.9%, and TD at 3.7%.
As interest rates increase, banks benefit from a higher net interest margin. This metric measures the difference between interest income received by a bank and the interest paid out to its deposit holders relative to their asset base. When the central bank increases their overnight lending rate, mortgage rates follow.
The stock prices haven’t budged much this year. While BMO has appreciated 3% since the start of January 2022, CIBC and Scotia has dropped a few percentage points while TD and Royal are both about flat for the year.
Valuations are still compelling. Royal and TD both trade around 11x earnings while Scotia, BMO, and CIBC are all between 9-10x earnings. This is below the historical average.
We expect credit losses to pick up and mortgage loan growth to slow, particularly given their strength at the moment. Higher fuel and food inflation is going to impact consumer behaviour and slow growth. Most banks said during their conference call that they expect the mortgage market to slow down in the second half of the year.
Nevertheless, Canadian banks are a core component of all client portfolios and will continue to be so, particularly with today’s low stock valuation multiples and attractive dividend yields.
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