Bank on Canadian Banks: Sustainable Yields and Upside Potential
With 2023 now in the rear view, we argue that it may be a tactical time to add bank exposure to your client portfolios via ETF-based mutual funds.
January 2024
Over the past several months, Canadian Banks have become increasingly attractive. Advisors may want to consider increasing their allocation to the sector not only for their sustainable yields, but for the upside potential as well.
Featured Funds:
- The recent quarterly earnings were constructive for Canadian banks, despite Scotia starting off reporting with a 23% earnings per share (EPS) miss. The rest of the banks in general picked up the slack, with most of them commenting on manageable credit exposures, particularly with the backdrop of increasing projections of a soft landing.2
- While the economic outlook still challenges the banks and growth more broadly, the resilience of the consumer, labour markets, and improving market sentiment bodes well. Canadian banks continue to trade at attractive valuations on a Dividend Yield, price-to-earnings (P/E) and price-to-book (P/B) level. Currently, the banks have an average P/E of 9.8 and an average P/B of 1.2 which is below its historical average P/E of 12.14 and P/B of 1.93 (since January of 2004).3
- Price action has been very constructive recently; performance of the funds was up for the month of December, as demonstrated in the table below.4
Annual Compound Returns:
| YTD | 1 Month | 3 Month | 6 Month | 1 Year | 3 Year | 5 Year | Since Inception | |
|---|---|---|---|---|---|---|---|---|
| BMO Canadian Banks ETF Fund (Series F) | 10.6% | 10.8% | 12.9% | 8.0% | - | - | - | -0.6% |
| BMO Covered Call Canadian Banks ETF Fund (Series F) | 6.7% | 7.5% | 9.3% | 4.6% | 6.7% | 7.4% | 7.5% | 7.6% |
As of December 31, 2023.
- BMO, Royal, TD, CIBC, and National Bank all raised Dividends for the next quarter. After the COVID moratorium on dividend hikes, bank dividend growth is firmly back on track with a 3yr dividend growth of 8% annualized.5 Overall, Canadian banks have a reliable dividend payment; the BMO Canadian Banks ETF Fund and BMO Covered Call Canadian Banks ETF Fund have an annualized distribution yield of 4.68% and 7.41%, respectively.6
- Both the BMO Canadian Banks ETF Fund and BMO Covered Call Canadian Banks ETF Fund are quite compelling, low-cost solutions to gain exposure to CAD banks. Despite challenging markets, their underlying ETFs gathered over $1.1 billion of AUM flows in 2023.7
- Central banks appear to have stopped raising rates for the time being and have signaled that high interest rates are working their way through the economy and pushing down inflation. The Bank of Canada (BoC) believes that existing rates may be restrictive enough to bring inflation down further, which may prove to be a tailwind for Canadian banks.
Benefits:
- Canadian banks are currently trading at a discount relative to the broad market.
- Previous market troughs in 2009 and 2020 proved to be opportune entry points into Canadian bank stocks.
- BMO Canadian Banks ETF Fund and BMO Covered Call Canadian Banks ETF Fund both offer single-ticket access to Canada’s Big Six banks.
Implementation:
Mutual Funds can provide an efficient way to gain exposure to Canadian banks.
The BMO Canadian Banks ETF Fund provides exposure to the Big Six Canadian banks on an equal weight basis. The Fund is rebalanced twice a year, allowing profits from winners to be redistributed in those banks that have underperformed—essentially a buy low, sell high strategy. The F series of the Fund currently has an annualized distribution yield of 4.68%.6
Investors that want to generate additional yield may consider BMO Covered Call Canadian Banks ETF Fund, which provides exposure to the same base portfolio as the BMO Canadian Banks ETF Fund with the addition of call options on the individual banks being sold in order to generate option premiums to enhance the yield of the portfolio. The F series of this Fund currently has an annualized distribution yield of 7.41%.6
Fund Codes:
BMO Canadian Banks ETF Fund
| FundSERV Codes | Front End8 | MER(%) |
|---|---|---|
| Advisor | BMO99262 | 1.41 |
| T6 | BMO34262 | 1.41 |
| F (Fee-Based) | BMO952628 | 0.28 |
| F6 | BMO36262 | 0.27 |
BMO Covered Call Canadian Banks ETF Fund
| FundSERV Codes | Front End8 | MER(%) |
|---|---|---|
| Advisor | BMO99765 | 1.64 |
| F (Fee-Based) | BMO957658 | 0.73 |
| F (Client Name) | BMO68765 | 0.73 |
Please contact your BMO Global Asset Management wholesaler for any support and guidance.
1 Management Expense Ratio, as of December 31, 2023.
2 Bank earnings source: Bloomberg, as of December 5, 2023.
3 Source for P/E ratios: Bloomberg, as of December 6, 2023.
4 BMO Global Asset Management, as of November 30, 2023.
5 Canadian banks 3-year dividend growth rate source: Bloomberg, as of December 5, 2023.
6 Annualized Distribution Yield as of December 31, 2023: The most recent regular distribution, or expected distribution (excluding additional year-end distributions), annualized for frequency, divided by current NAV. Source: BMO Global Asset Management.
7 AUM flows source: BMO Global Asset Management, as of November 30, 2023.
8 Front End = Sales Charge. MER as of December 31, 2023.
FOR ADVISOR USE ONLY. No portion of this communication may be reproduced or distributed to clients as it may not comply with Sales Communications requirements.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Distributions are not guaranteed and may fluctuate. Distribution rates may change without notice (up or down) depending on market conditions. The payment of distributions should not be confused with an investment fund’s performance, rate of return or yield. If distributions paid by an investment fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an investment fund, and income and dividends earned by an investment fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero. Please refer to the distribution policy for BMO ETF set out in the prospectus.
Cash distributions, if any, on units of a BMO ETF (other than accumulating units or units subject to a distribution reinvestment plan) are expected to be paid primarily out of dividends or distributions, and other income or gains, received by the BMO ETF less the expenses of the BMO ETF, but may also consist of non-taxable amounts including returns of capital, which may be paid in the manager’s sole discretion. To the extent that the expenses of a BMO ETF exceed the income generated by such BMO ETF in any given month, quarter or year, as the case may be, it is not expected that a monthly, quarterly, or annual distribution will be paid. Distributions, if any, in respect of the accumulating units of BMO Short Corporate Bond Index ETF, BMO Short Federal Bond Index ETF, BMO Short Provincial Bond Index ETF, BMO Ultra Short-Term Bond ETF and BMO Ultra Short-Term US Bond ETF will be automatically reinvested in additional accumulating units of the applicable BMO ETF. Following each distribution, the number of accumulating units of the applicable BMO ETF will be immediately consolidated so that the number of outstanding accumulating units of the applicable BMO ETF will be the same as the number of outstanding accumulating units before the distribution. Non-resident unitholders may have the number of securities reduced due to withholding tax. Certain BMO ETFs have adopted a distribution reinvestment plan, which provides that a unitholder may elect to automatically reinvest all cash distributions paid on units held by that unitholder in additional units of the applicable BMO ETF in accordance with the terms of the distribution reinvestment plan. For further information, see Distribution Policy in the BMO ETFs’ prospectus.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.
Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by current net asset value (NAV). Distributions are not guaranteed, may fluctuate and are subject to change and/or elimination. Distribution rates may change without notice (up or down) depending on market conditions and net asset value (NAV) fluctuations. The payment of distributions should not be confused with a BMO Mutual Fund’s performance, rate of return or yield. If distributions paid by a BMO Mutual Fund are greater than the performance of the investment fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a BMO Mutual Fund, and income and dividends earned by a BMO Mutual Fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero.
Distributions, if any, for all series of securities of a BMO Mutual Fund (other than ETF Series) are automatically reinvested in additional securities of the same series of the applicable BMO Mutual Fund, unless the securityholder elects in writing that they prefer to receive cash distributions. For further information, see the distribution policy for the applicable BMO Mutual Fund in the simplified prospectus.
Legal and regulatory disclosures
This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.