The Canadian banks are fresh off a pretty underwhelming earnings season. With recession fears mounting, some of the banks are at risk of climbing provisions for credit losses. Indeed, bank stocks are not fun to hold when times get tough. Fortunately, I think there’s already been so much pain considered at these levels. Depending on who you ask, we’re headed for a recession that may be leaning toward the shallow end of the pool.
Even if the U.S. avoids falling into recession, I’m not so sure there’s any hope on this side of the border. This does not bode well for Canada’s top banks. Still, they’re resilient, and their dividends are more than likely to survive the coming wave of economic unknowns. If anything, I expect more of the same for the banks: steady dividend payments with a chance of growth.
In this piece, we’ll check in with two Canadian banks that have taken varying hits to the chin.
Canadian Imperial Bank of Commerce
Canadian Imperial Bank of Commerce (TSX:CM), or CIBC, has been a standout winner this earnings season. I am truly impressed. Even in the face of the chaos in the banking sector, CIBC has managed to pull off a bottom-line beat, with $1.70 in earnings per share (EPS), seven cents above that of expectations. Though provisioning inched higher, CIBC seems to be in full control, with expenses staying manageable.
As rates keep rising, I’d look for management to keep managing effectively, as the bank catches a bit of a break on the front of net interest margins (NIMs), as rates look to climb higher from here. In any case, I’m a fan of the 6.1% dividend yield and do not think the solid second quarter has been fully appreciated by Mr. Market.
My takeaway?
Whether you’re in it for the dividends or rebound potential, CIBC stock looks like a great deal right here while it’s still down around 31% off last year’s highs. Will it be an easy path for CIBC in the second half? Probably not. But I do expect CIBC could take a hit on the chin far better than some of its peers. CM stock trades at around 11.27 times trailing price to earnings (P/E), which is quite modest.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY) is a $171.1 billion banking king that’s off 16.4% from its 2022 highs at writing. Indeed, Royal has really outshined some of its smaller brothers, CIBC included. Still, the stock is among the priciest on the P/E ratio front, with a 12.2 times trailing P/E. The 4.37% dividend yield is also considerably lower than the likes of CIBC.
Despite the relative industry outperformance, Royal didn’t clock in the best second quarter this earnings season. Loan provisions weighed down the results, with the company clocking in $2.65 in EPS — less than the expected $2.79. Despite the earnings miss, Royal hiked its quarterly dividend to $1.35 (a whole three-cent raise). Given the circumstances, I think Royal Bank is still worth the premium price of admission. It will make it through a provision storm, as it always does.
