Canadian banks are in the midst of reporting their second-quarter fiscal 2019 results, and we have seen a bit of everything so far — some of it consistent with what we have been warned about, and some positive surprises that can leave us feeling comfort with our bank holdings.
Bank holdings have provided reliable and growing dividends over the last many years, and that will continue in future years, notwithstanding a more challenging environment going forward.
The main trends to consider when analyzing Canadian bank stocks are credit quality, loan growth, or lack thereof, international diversification, and the outlook for the Canadian consumer, as debt loads remain high and the housing market remains at risk.
Slowing loan growth and rising provisions
Canadian Imperial Bank of Commerce showed us the vulnerability of the Canadian banking environment, specifically with respect to loans and mortgages.
Slowing loan growth was evident in CIBC’s results, with management saying that the slowdown in mortgage and real estate loans was more dramatic than they had expected and that we should expect the environment to remain challenging.
Keep in mind, though, that the last many years have seen an exceptional environment of strong loan growth and limited loan losses.
In this environment, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is on the top of the list of Canadian banks to own.
The bank reported a surprisingly strong 4.2% increase in Canadian P&C EPS, a better performance than its peers, and a 15% increase in U.S. P&C earnings, as loan growth was 5.6% and lower expenses brought efficiency ratio improvement.
The bank’s better-than-expected results partly speak to the fact that TD is the least vulnerable to weakness in the Canadian banking environment, with more than 35% of the bank’s income coming from the U.S.
The fact that TD has less exposure to Canada than many of its peers means that TD stock has less downside, and its dividend is more resilient with more upside.
Recall that TD is the only bank that has initiated a once-a-year dividend increase policy. The latest dividend increase was in the first quarter of fiscal 2019, where the bank increased the dividend by 10% to $0.74 per share.
The dividend yield is currently 3.9%, and although the stock trades at a premium to its peers, I believe that this premium is warranted and that TD stock is a key holding in portfolios looking for dividend income and stability.
