Is This the Right Time to Buy Canadian Banks?
With the pace of economic growth slowing sharply in Canada and monthly CPI (Consumer Price Index) data continuously coming in lower, a rate cut by the Bank of Canada in June was highly expected. When interest rates drop, it typically eases the pressure on defaults, bringing potential tailwinds to Canada’s Big Six lenders. Now could serve as a tactical time to add or increase a weighting to Canadian banks.
July 2024
Benefits
- The BMO Canadian Banks ETF Fund provides equal-weight exposure to large, diversified Canadian bank stocks
- The BMO Covered Call Canadian Banks ETF Fund’s call option writing reduces volatility while producing monthly cash distributions
Canadian banks remain resilient even as loan loss provisions continued to weigh on profits. Recent quarterly earnings were constructive for Canadian banks as five of the six major lenders beat expectations.1
BMO, Bank of Nova Scotia, Royal Bank of Canada and National Bank all raised dividends which bodes well for income-seeking investors. Overall, Canadian banks have a reliable dividend payment, with the BMO Canadian Banks ETF Fund and the BMO Covered Call Canadian Banks ETF Fund boasting annualized distribution yields of 4.57% and 7.36%, respectively.2
Canadian banks continue to trade at attractive valuations on a dividend yield, price-to-earnings (P/E) and price-to-book ratio (P/B) bases. Currently the banks have an average P/E of 11.06 and an average P/B of 1.36 – below historical long-term averages of 12.14 and 1.93, respectively (since January of 2004).3
Price action has been very constructive over the last six months, and we have seen some momentum with the BMO Canadian Banks ETF Fund, which has experienced a 15.5% climb in that time period.4
BMO’s equal weight strategy is designed to remove concentration risk in a particular company. With the more recent volatility with certain Canadian banks, we have seen more stable returns from the BMO Canadian Banks ETF Fund and the BMO Covered Call Canadian Banks ETF Fund.
Both the BMO Canadian Banks ETF Fund and the BMO Covered Call Canadian Banks ETF Fund are low-cost solutions to gain exposure to Canadian banks. Their underlying ETFs—the BMO Equal Weight Banks Index ETF (Ticker: ZEB) and the BMO Covered Call Canadian Banks ETF (Ticker: ZWB)—have remained two of the largest, most liquid Canadian bank ETFs in Canada and have gathered over $6.5 billion of AUM since inception.5
Implementation
For exposure to an approximate equal weighted basket of Canadian Banks consider buying the BMO Canadian Banks ETF Fund, or with an enhanced yield component, the BMO Covered Call Canadian Banks ETF Fund.
|
Fund |
YTD |
1 Month |
3 Month |
6 Month |
1 Year |
3 Year |
5 Year |
Since Inception |
|
BMO Canadian Banks ETF Fund |
4.2% |
2.7% |
4.4% |
15.5% |
16.7% |
- |
- |
1.6% |
|
BMO Covered Call Canadian Banks ETF Fund |
3.9% |
2.7% |
3.6% |
11.7% |
12.6% |
2.2% |
7.0% |
7.7% |
Source: BMO Global Asset Management, as of May 31, 2024
1 Bloomberg May 30, 2024.
2Annualized Distribution Yield as of May 31, 2024: 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.
3 Bloomberg March 31, 2024.
4 BMO Global Asset Management, as of May 31, 2024.
5 AUM Flows source BMO Global Asset Management June 14, 2024.
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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.
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This article was published on July 10, 2024.
“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.
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