The profits keep rolling in for Canada’s big banks despite concern over an ongoing tariff war with the United States.
TD Bank, Bank of Montreal, Bank of Nova Scotia, CIBC and Royal Bank of Canada beat third quarter earning estimates on smaller-than-expected loan loss provisions.
Canadian banks had factored in the likelihood of a significant economic slowdown as a result of the trade war, which has not yet happened.
The financial fortunes of just about every Canadian are tied to the success of the big banks. Millions of us own shares directly or through company pensions, Canadian equity mutual funds or exchange traded funds (ETFs) in our registered retirement savings plans (RRSPs) and tax free savings accounts (TFSAs). Even the Canada Pension Plan (CPP) owns shares in the big banks.
They operate as an oligopoly where profits are protected through government regulation and foreign ownership restrictions, leaving a bigger piece of a profitable pie for the masses, who have few other choices among Canadian large cap stocks.
Earnings seasons have worked out well for long-term retirement investors over the decades, generally resulting in yawn-inspiring profit growth that most often surprises by pennies above estimates, and regularly include dividend increases.
Continuing growth for long-term investors
TD Bank shares have rallied over 37 per cent so far this year, eclipsing double-digit rallies by the rest of the big banks.
A large part of TD’s success follows a difficult 2024 when it agreed to pay over $3 billion in penalties to U.S. regulators for money laundering charges.
Despite last year’s financial stumble and the global pandemic, shares in TD Bank have risen by 58 per cent over the past five years.
Even with that increase in TD’s share price, it’s still trading well below the other banks in relation to the past year’s earnings 11 times earnings per share.
In comparison, stock in Canada’s largest bank has nearly doubled in value over the past five years. Royal Bank of Canada shares are currently trading at a richer 15.13 times trailing earnings.
Over the past five years, shares in Bank of Montreal have also doubled and are currently trading at 14.4 times trailing earnings.
Shares in CIBC have doubled in value over the past five years as well but are trading at a lower 13 times trailing earnings.
Bank of Nova Scotia shares have risen by 48 per cent over the same period and are trading at 16.3 times trailing earnings.
Big banks keep the income stream flowing
But it’s the Canadian bank dividends that really matter for long-term investors saving for retirement.
Generous annual yields from three per cent to five per cent can compound over time and add plenty of thrust to income streams that keep cash flowing in any portfolio.
Bank of Nova Scotia currently leads the other banks with a 5.2 per cent payday. CIBC ranks second at 3.75 per cent, followed by RBC at 3.1 per cent.
Canadian bank stocks are famous on global stock markets for consistently paying out and have not cut their dividends since Confederation.
Canadian economy not out of the woods yet
Dividend payouts, of course, are at the discretion of any company and the tariff war continues into the current quarter.
The Canadian economy has been resilient so far, but more sucker-punches from the south could hurt the fortunes of the banks.
One year yields on guaranteed income certificates, which are guaranteed, are currently paying out about 3.5 per cent annually and could be a safer alternative for retirement investors.
In an interview this week, Scotiabank CEO Scott Thomson told BNN Bloomberg, “We’re not through the woods yet.”
