As the summer wraps up, many Canadians might not be focusing on the latest earnings reports from the big banks. However, these reports are crucial since most Canadians are connected to the financial health of these banks, whether they realize it or not.
Why Bank Earnings Matter to You
Millions of Canadians hold shares in major banks, either directly or through company pensions, mutual funds, or ETFs in their RRSPs, TFSAs, or even the Canada Pension Plan (CPP). These banks operate in a way that’s heavily regulated by the government, ensuring they stay profitable. This setup benefits those who invest in them, as there are limited other options among large Canadian stocks.
Over the years, bank earnings have usually meant steady profit growth, sometimes surprising just slightly above expectations. This often comes with dividend increases, which are a big deal for long-term investors. Currently, Canadian banks offer annual dividend yields between 3.5% and 6.5%, and they’ve never cut these payouts since Canada became a country.
The Banks Have a Strong History
Since the early 1990s, the shares of the "Big Five" banks – RBC, TD, Scotiabank, BMO, and CIBC – have grown by an incredible 1,750% on average. These banks became known worldwide for their stability, especially after they successfully navigated the 2008 global financial crisis. However, recent hikes in global interest rates have created some challenges.
Cracks Are Starting to Show
In recent times, the big Canadian banks have faced difficulties. For example, BMO recently reported lower-than-expected earnings, which caused their shares to drop by over 7%. This was due to increased loan-loss provisions, which have been cutting into profits. TD Bank, too, posted its first quarterly loss in decades due to a massive provision for fines related to money-laundering investigations in the U.S. Meanwhile, CIBC managed to stay profitable, but not without struggling with issues in its U.S. commercial real estate portfolio.
Wall Street's Changing Views on Canadian Banks
Big investors on Wall Street are starting to change their views on Canadian banks. Analyst ratings have shifted from mostly “buy” recommendations to more “holds,” “sells,” and even some shorts (bets that the stock price will fall). For instance, only 6% of analysts recommend buying Scotiabank, while 69% suggest holding, and 25% advise selling. The outlook for other banks is also mixed, though RBC still holds strong with 73% of analysts recommending it as a buy.
What About Dividends? Are They Safe?
Despite recent troubles, experts believe that bank dividends, which many Canadians rely on for income, are safe. Paul Gardner, a portfolio manager, has reduced his holdings in Canadian banks except for RBC, which he considers the best-performing bank stock in recent months. He cites rising costs, inflation, and a flat yield curve as reasons for the banks' poor performance. However, he expects the banks to return to steady profits, ensuring that dividends continue to flow.
In summary, while Canadian banks are facing challenges, they remain a critical part of many Canadians' financial lives, and their dividends are expected to remain stable.