Are Canadian Banks Truly a Bargain?

A Breakdown of Q1 Bank Earnings

The first quarter earnings from Canada’s “Big Six” banks were largely positive. And while some were stronger than others, most institutions beat expectations. More importantly, when comparing Q1 2024 to Q1 2023, earnings were generally up—which is a trend in the right direction. Below, we briefly recap Canadian bank earnings, their increases in loan loss provisions, and current quarterly dividends.

Bank of Montreal (BMO)¹

• Earnings Q1 2024: $1.29 billion
• Earnings Q1 2023: $133 million
• Set aside $627 million for loan loss provisions
• Kept its quarterly dividend unchanged at $1.51/share

Bank of Nova Scotia (BNS)

• Earnings Q1 2024: $2.2 billion
• Earnings Q1 2023: $1.76 billion
• Set aside $962 million for loan loss provisions
• Kept its quarterly dividend unchanged at $1.06/share

CIBC (CM)

• Earnings Q1 2024: $1.73 billion
• Earnings Q1 2023: $433 million
• Set aside $585 million in loan loss provisions
• Kept its quarterly dividend unchanged at $0.90/share

National Bank (NA)

• Earnings Q1 2024: $922 million
• Earnings Q1 2023: $876 million
• Set aside $120 million for loan loss provisions
• Kept its quarterly dividend unchanged at $1.06/share

Royal Bank of Canada (RY)

• Earnings Q1 2024: $3.6 billion
• Earnings Q1 2023: $3.2 billion
• Set aside $813 million for loan loss provisions
• Kept its quarterly dividend unchanged at $1.38/share

TD Bank (TD)

• Earnings Q1 2024: $2.8 billion
• Earnings Q1 2023: $1.58 billion
• Set aside $1 billion for loan loss provisions
• Kept its quarterly dividend unchanged at $1.02/share

While these results were generally encouraging, concerns remain, especially with respect to three themes have become very topical: the deterioration of the mortgage loan book, personal loan charge-offs and delinquencies, and weaker earnings growth. The caveat here is interest rates. With inflation lingering, the runway is proving hard to clear for the Bank of Canada (BoC) to begin cutting rates. Until rates ease, pressures on the loan books of Canadian banks will, unfortunately, persist.

A Look at Crises Past—and Where We Are Today

Comparing the Economic Environments in 2008 and 2024

As the banks brace for bad loans, it brings back visions of 2008 for some investors. However, while loan loss provisions have increased over the last 12 months, we are nowhere near the levels seen during the Great Financial Crisis (GFC), according to Bloomberg data. During the GFC, on average, non-performing loans made up about 150 basis points (bps)² of the “Big Six’s” total loan portfolio. Today, it is only about 50 bps²—or a third of where we were then.

The scenario we are facing is also quite exceptional. In 2008 and 2009, liquidity dried up, which had a large impact on the overall plumbing of the financial system. This time around, the two standout differences have been the fallout from the U.S. regional banks, which we have not seen much of in Canada, and unemployment numbers. In 2009, the unemployment rate peaked at 8.6%,³ whereas today, you could argue that we are nearly at full employment.⁴

In short, it has been over a decade since the GFC, and much has changed—including the implementation of the Basel III regulatory framework, which requires more risk monitoring for banks across the world.

The U.S. Banking Crisis

Canadian and U.S. banks are quite different. Here in Canada, higher rates will typically impact more traditional loans and mortgage books. In the U.S., where they have more regional banks, commercial real estate is often funded at the local level. As such, regional banks typically carry interest rate risk on their balance sheets.

Think back to spring 2023 when the U.S. regional banking crisis began. The trouble started with their deposits. As they reinvested money in U.S. Treasuries and mortgage-backed securities, they had to take on duration risk. Essentially, as interest rates rose, their held-to-maturity-portfolios went underwater. The Bank Term Funding Program (BTFP), which was introduced by the U.S. Federal Reserve in March 2023 to help financial institutions sell securities in times of stress, expired earlier this year.

Overall, U.S. banks are more leveraged toward interest rates, which means if cuts come down more than anticipated, U.S. banks could outperform. On the other hand, if interest rates stay higher for longer, Canadian banks would likely be better positioned in that environment.

Three Reasons to Bank on Canadian Banks

Though rate uncertainty remains, here are three reasons the Canadian banks are a bargain poised for a rebound.

1. Attractive valuations

At the time of writing, Canadian banks are trading at a relative bargain to the broader market. The average forward price-to-earnings (P/E)⁵ ratio of the “Big Six” is around 10 times versus the nearly 16 times for the TSX overall. On a valuation basis, that’s a 35% discount to the market. If you have a longer time horizon, say two to three years, these levels present an attractive valuation opportunity. (Read our client-friendly explainer for more)

2. Dividends

Many of the “Big Six” banks have a 100-plus year track record of paying dividends, with the last dividend cut occurring in the 1990s.⁶ Right now, the dividend yield on the BMO Canadian Banks ETF Fund is about 4.7%,⁷ which is fairly healthy and can compensate investors if headwinds for Financials continue.

3. Improving landscape

The main macroeconomic concern in the market is persistent inflation, something we haven’t seen in over 40 years. However, once the BoC is satisfied that inflation is under control and starts cutting rates, the yield curve should “normalize,” becoming upward-sloping. This tends to be a favourable environment, given the banks typically borrow on the short end and lend on the long end. Moreover, it will also take the mounting pressure off of their loan books.

Fund Codes

Please contact your BMO Global Asset Management wholesaler for any additional support and guidance.

¹ (2024, February 27). BMO Financial Group Reports First Quarter 2024 Result. Cision.

² Bloomberg, as of March 6, 2024.

³ (2010, March 29). Canada’s employment downturn. Statistics Canada.

⁴ (2024, March 8). Labour Force Survey, February 2024. Statistics Canada.

⁵Source for P/E/ ratios: BMO Global Asset Management, as of February 14, 2024. Forward P/E ratio = The forward price to earnings ratio is the ratio for valuing a company that measures its current share price relative to its forecasted per-share earnings (EPS).

⁶ Nasdaq Dividend History Database.

⁷ BMO Global Asset Management, as of February 28, 2024. BMO Canadian Banks ETF Fund - Series F Annualized Performance – 1-month: 1.73%; 3-month: 10.68%; 6-month: 10:58%; YTD: -0.11%; 1-year: 2.50%; Since Inception: -0.65%.