The TSX’s financial sector, led by Canadian banks, is trending downward and has lost 3.26% in the last 30 days. It joins energy as the one of the sectors with negative returns year to date. Bank stocks, in particular, have been struggling due to the crisis that hit American financial institutions.
The Big Five remains solid investment prospects, but if you were to invest in June 2023, National Bank of Canada (TSX:NA) is the logical choice. Veritas Investment Research’s analyst Nigel D’Souza said Canadian-focused banks tend to outperform peers with more international exposure. Also, it’s better to sidestep regional banks like Laurentian Bank of Canada (TSX:LB) for good measure.
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Strong headwinds
Laurentian Bank will report its second-quarter (Q2) fiscal 2023 results on June 1, 2023, although industry analysts expect higher loan loss provisions like the giant lenders. In Q1 fiscal 2023, total revenue grew by only 1% year over year to $260.1 million, while net income dropped 6% to $51.9 million versus Q1 fiscal 2023.
The $1.33 billion Quebec-based bank raised its provision for credit losses during the quarter by 63.8% to $15.4 million compared to the same quarter last year. Its president and chief executive officer (CEO) Rania Llewellyn said, “We had good financial results this quarter driven by growth in Commercial Banking while also maintaining healthy capital ratios and liquidity levels.”
At $30.67 per share, the year-to-date loss is 3.7%, and the trailing one-year price return is -14.45%. While LB’s dividend yield is a mouth-watering 6.1%, the stock hasn’t done well in the last three years (+23.38%). Furthermore, the headwinds are stronger for regional banks.
Many investors fear a domino effect following the collapse of Silicon Valley Bank and two other regional financial institutions in the United States. The positive thing going for LB is the stability of Canada’s banking system. Unfortunately, prudent and risk-averse investors will avoid regional banks.
Top performer
Half of the Big Six bank stocks have had positive returns thus far in 2023, while the other half has underperformed. At $100.45 per share, NA is the top performer, with its market-beating return of 11.3%. If you invest today, the dividend yield is 3.88%. Given the low 38.9% payout ratio, the dividend payments should be safe and sustainable.
According to NA’s president and CEO Laurent Ferreira, the $33.88 billion bank started fiscal 2023 on solid footing. In the quarter that ended January 31, 2023, net income dipped slightly by 5% year over year to $881 million.
Ferreira added, “The bank generated superior return on equity, highlighting the strategic diversification of our earnings stream. Our capital level is strong, giving us the flexibility to invest in our businesses to drive future growth.”
Rising reserves for bad loans
Industry experts said rising loan-loss provisions is the theme of the current bank earnings season. They also said banks are looking at a real possibility of businesses and consumers defaulting on their loan payments. It would be the same with NA when it presents the Q2 fiscal 2023 results on May 31, 2023.
During the Q1 fiscal 2023 conference call, Ferreira said, “In a highly uncertain macroeconomic environment, we are maintaining a defensive positioning.” The assurance should lend confidence to invest in the top-performing big bank stock.
