The Canadian market is renowned for its significant exposure to the energy sector, particularly oil and gas producing entities. However, financials still make up the largest sector on the S&P/TSX Composite Index. The S&P/TSX Capped Financial Index moved down marginally to close out the trading session on Tuesday, March 28. This means Canadians should keep a close eye on the unfolding global banking crisis.
Today, I want to touch on recent developments and compare two of the Big Six Canadian bank stocks: Royal Bank (TSX:RY) and Bank of Montreal (TSX:BMO). Let’s dive in!
Why all eyes are on the banking sector right now…
March has seemed like a particularly long month for the banking sector in 2023. Earlier this month, investors found out that Silicon Valley Bank, the 16th-largest bank in the United States, had collapsed and put its depositors in a frightening position. Signature Bank, a New York-based institution with $110 billion in assets at year-end in 2022, collapsed two days later.
These middle-tier United States banks had thrived by investing in mortgage-backed securities and Treasury bonds in a very friendly interest rate environment. However, the central bank policy turned toward aggressive interest rate hikes. This changed things practically overnight.
The U.S. government opted to provide much-needed assistance and guaranteed deposits for both failed institutions. Should Canadians be worried about their own institutions in this climate?
The case for Royal Bank in late March
Royal Bank is the largest TSX stock by market cap and the largest financial institution in Canada. Indeed, it is one of the most influential financial institutions on the planet, boasting over $1.71 trillion in assets. Shares of this bank stock have dropped 8.2% month over month as of close on March 28. That pushed the stock into negative territory in the year-to-date period.
In the first quarter of fiscal 2023, Royal Bank reported adjusted net income of $4.3 billion, or $3.05 per diluted share — up 4% and 7%, respectively, compared to the previous year. It posted net income growth of 8% to $2.12 billion in its Personal and Commercial (P&C) Banking segment, powered by interest rate increases that had bolstered profit margins. The Wealth Management and Capital Markets segments also delivered net income growth of 3% and 9%, respectively, over the first quarter of fiscal 2022.
Shares of this bank stock possess a favourable price-to-earnings (P/E) ratio of 12. Meanwhile, Royal Bank offers a quarterly dividend of $1.32 per share. That represents a solid 4.1% yield.
Here’s why you shouldn’t sleep on Bank of Montreal
Bank of Montreal is the third largest of the Big Six Canadian bank stocks by market cap. Shares of this bank stock have dropped 9.3% over the past month. The stock is now down 5.8% so far in 2023.
The bank released its first-quarter (Q1) fiscal 2023 earnings on February 28. BMO delivered adjusted net income of $2.27 billion in Q1 2023 — down from $2.58 billion in the previous year. Meanwhile, provisions for credit losses (PLC) more than doubled to $217 million. Net income in its P&C Banking segment fell 2% to $980 million. Moreover, its U.S. P&C segment delivered net income growth of 3% to $698 million.
This bank stock last had a very attractive P/E ratio of 7.3 at the time of this writing. Meanwhile, it offers a quarterly distribution of $1.43 per share, which represents a 4.8% yield.
Verdict
Royal Bank is a giant you can depend on for the long term. However, BMO offers superior value and income in late March. I’m going with the smaller of the two bank stock titans today.
