Canadian banks continue to be a long-term opportunity despite recent headwinds (2024)

Given their recent quarterly earnings, Canadian banks are clearly facing a multitude of challenges. These include slower loan growth, contracting net interest margins, rising provisions for credit losses, and higher capital requirements. What’s more, if a recession does occur, Provisions for Credit Losses (PCLs) could increase even more and further reduce earnings for the sector. However, typically the best time to buy and own banks is during the reserve building phase while valuations are depressed. Once you come through the recession and the banks start to release reserves back into earnings, the strong earnings growth combined with attractive valuations drives strong stock performance.

In other Canadian banking news, we recently saw the sudden departure of Laurentian Bank’s CEO after just three years in the role. The departure followed a strategic review that ended without selling the bank, and a subsequent prolonged technology issue that prevented depositors from accessing their accounts for several days. It isn’t clear which event drove the departure —perhaps it was both — but this is the second CEO in a row to depart Laurentian Bank after a relatively short tenure.

Additionally, RBC Royal Bank recently injected capital into its U.S. subsidiary City National in an effort to lower funding costs and improve profitability in its U.S. business. We view this as a prudent move, but it doesn’t fully offset the pressures U.S. banks continue to face.

The information was prepared by CIBC Asset Management Inc. using third-party service provider Morningstar Direct, as at August 31, 2023.

In every recession and timeframe analyzed, Canadian bank stocks outperformed the broader S&P/TSX Composite Opens in a new window.. Why? Markets are forward-looking and typically anticipate an economic recovery even while a recession is underway.

Despite headwinds, bank fundamentals remain solid. Valuations are now at multi-decade lows with high dividends that pay investors to hold through the cycle. As at August 31, 2023, Canadian Banks pay close to a 5.00% dividend yield, in comparison to a 3.55% dividend yield for the broader Canadian market, and 1.68% for the S&P 500 Index Opens in a new window.. (Indices used as a proxy: Banks — S&P/TSX Banks Index; Canadian market — S&P/TSX Composite.)

Canadian banks are some of the most well-capitalized, safest financial institutions globally, and long-term investors are being paid to hold onto them.

Overall, we maintain ownership of several banks within our portfolios at CIBC Asset Management. Very often, the best time to invest in Canadian banks is in the midst of a recession, and we continue to see medium to long-term strength in the Canadian banking sector (PDF, 215 KB) Opens in a new window..

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