Income investors agree that Canadian big bank stocks are safe assets to own regardless of the market environment. Whether it’s the largest lender or the fifth largest, you get value for money. One industry analyst even said that the last Canadian banking crisis happened about 18 decades ago.
The 2008-2009 financial crisis is proof that Canada’s banking industry is unshakeable. Last year was similarly challenging, except that the headwinds were a global pandemic and historic low interest rates, not insolvency of a top U.S. investment bank.
Like in 2008, none of the big banks sought financial support from the Bank of Canada in 2020. Instead, they fortified their shock absorbers by raising their provisions for credit losses (PCLs) to staggering levels. Fortunately, the economy endured the crisis, and the anticipated deterioration of loan portfolios did not happen.
As a result, all these big lenders had huge cash stockpiles at the close of Q2 fiscal 2021 (quarter ended April 30, 2021). If you want to be flush with cash from an unending income stream in Q3 2021 and beyond, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) is the logical choice in the current bull market.
Highest income growth
Canada’s fifth-largest lender reported a 278% increase in adjusted net income in Q2 fiscal 2021 versus Q2 fiscal 2020. The net income of CIBC’s Canadian Personal and Business Banking segment grew 270% to $440 million, as PCL dropped 97.7% to only $32 million compared to $1.4 billion from the previous year.
Again, its Canadian Commercial Banking and Wealth Management unit reported a 94% increase in net income because of lower PCL. Notably, CIBC’s U.S. Commercial Banking and Wealth Management unit saw a 1,340% increase in net income from Q2 fiscal 2020.
CIBC’s excess common equity tier 1 (CET1) capital will be $8.7 billion if you apply the 11% industry-standard floor. At 9% regulatory floor, the CET1 capital overflow stands at $3.5 billion. During the pandemic, the Office of the Superintendent of Financial Institutions (OSFI) mandated banks to hold off dividend increases and share-buyback programs.
Potential for “big” dividend increase
With the lifting of the OSFI restrictions recently, CIBC analyst Paul Holden said significant dividend increases and share repurchases are possible. The bank stock trades at $141.47 per share (+33% year to date) and pays a 4.13% dividend. Remember, this $63.53 billion bank has been paying dividends since 1868. Besides the impressive dividend track record, CIBC’s total return in the last 48.42 years is 18,129.86% (11.35% CAGR).
Our strong performance in the second quarter of 2021 is a result of executing on our client-focused growth strategy,” said Victor G. Dodig, CIBC’s president and CEO. He expressed delight over the bank’s strong performance in Q2 fiscal 2021. He said, “We are delivering results by building on the momentum we have established in our Canadian consumer franchise.”
Canada’s banking system continues to maintain its superior standing on the global stage. The key attributes are sound government fiscal management policies, a prudent regulatory environment, and strong underlying credit fundamentals.
CIBC is the top investment pick in the financial sector today, because it outperforms industry peers as well as the TSX. The successful execution of the client-focused strategy by management should drive business growth further. Scoop the blue-chip stock now. Analysts predict the price by another 18.5% to $167.70 soon.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.