As central banks have continued to tighten, the risk to reward for the Big Five has improved significantly.

While the big five Canadian banks (RBC, TD, BNS, BMO and CIBC) comprise 19.74% of the TSX Composite Index (as of September 6, 2022), our JJM North American Equity portfolio weight remains at just over 3%. We are beginning to become more open to adding to the group over the next several months.

 

According to our analyst Paul Holden, the Canadian banks, having just reported third quarter results, are currently operating in a challenging environment. While loan growth remains positive, he expects it to be only about 5% for 2023, versus 13% for 2022. He also expects the provision for credit losses (PCLs) to rise from a current level of 11 basis points, i.e., 0.11%, to 33 basis points in 2023. Paul adds that expense growth, at 5%, was higher than expected.

 

So, what’s the (moderately) good news? Net interest margins (NIM) remain strong. Bank stocks, having fallen 22% on average from their annual highs, are coming down to price points that are more enticing. Valuations are historically “cheap,” with average price to earnings (PE) multiples expected to be 9.1 for 2023, well off the long-term average of 10.8. Price to book (PB) value ratios of 1.47 are likewise far lower, i.e., 10%, than historical averages. Dividend yields average an attractive 4.7%, ranging from 4.2% to 5.8%, compared to the 4.0% historical average.

 

Please feel free to read Paul’s more detailed remarks in his September 6th report (attached). We list below, for your easy reference, a glossary of terms.

 

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ACL: allowance for credit losses

CET1: common equity tier 1

CMRR: committed monthly recurring revenue

EPS: earnings per share

FQ2: fiscal quarter 2

LTM: last twelve months

NCIB: normal-course issuer bid

NII: net interest income

NIM: net interest margin

NIR: net interest rate

NSFR: net stable funding ratio

P&C banking: personal & commercial banking

P/BV: price-to-book ratio/value

PCL ratio: provision for credit losses

PTPP: pre-tax pre-provision

Q/Q: quarter over quarter

ROE: return on equity

Y/Y: year over year