The collapse of Silicon Valley Bank (SVB) and two more American banks brought back unpleasant memories of the Global Financial Crisis in 2008. Bank failures across the border add to the anxiety of investors. While there’s no sign of stress on the local banking system, the country could still feel it because the issue is global.
Fortunately, Canada’s banking sector has a different regulatory regime, and Big Banks have diversified holdings or interests. Thus, industry experts believe depositors and investors should be calm and confident about their money. SVB’s strong concentration in certain investments, particularly the tech sector, was a disadvantage.
Top-notch investment choices
The TSX declined 1.6% (311.80 points) to 19,774.90 on March 10, 2023, following news of the instantaneous bank run and eventual collapse of SVB. Canada’s primary stock market hasn’t risen above 20,000 points since and could dip some more in the coming weeks.
Although Canadian banks are under the microscope, it doesn’t mean you should stay away from them. The Canadian Imperial Bank of Commerce (TSX:CM) and the National Bank of Canada (TSX:NA), two of the Big Six banks, remain solid investment choices for young and old Canadians, dividend-earners, long-term investors, and retirees.
CIBC and NA get protection from the country’s regulated banking system and rigorous oversight of the Office of the Superintendent of Financial Institutions (OSFI). No well-capitalized Canadian bank, including these fifth- and sixth-largest banks, can be complacent and imprudently invest capital.
CIBC (6.51%) and NA (7.93%) also lead their industry peers in revenue growth in the last five years. The former’s five-year dividend growth is 5.2% compared to the latter’s 9.4%. If you invest today, CIBC’s dividend offer is 5.99%, while NA pays a 4.13% dividend. The payout frequency of both is quarterly.
Resilient capital position
Despite the 77% decline (down to $432 million) in net income in Q1 fiscal 2023 versus Q1 fiscal 2022, CIBC describes the quarterly financial results as solid. Its President and CEO, Victor G. Dodig, said the bank maintains a resilient capital position, strong risk management, and credit quality.
The Capital Markets business segment reported the highest year-over-year percentage increase (up 13% to $612 million) in net income. Also, CIBC increased its provision for credit losses (PCLs) by 293.3% to $295 million from a year ago.
Your money won’t be in jeopardy if you invest in CIBC ($55.99 per share) today. The bank’s dividend track record is 155 years and counting.
Laurent Ferreira, NA’s President and CEO, said, “The Bank is starting the year on solid footing with robust results across all business segments and strong margin performance.” In Q1 fiscal 2023, net income declined by 5% to $881 million versus the same quarter in fiscal 2022.
Because of the less favourable economic environment, NA had to take a defensive position and provide a substantial allowance for credit losses. The PCL increased to $86 million. NA noted the lag time in the pass-through of aggressive rate hikes and believes it will continue to weigh on the economy throughout 2023. NA trades at $93.21 per share.
Pedro Antunes, the chief economist at the Conference Board of Canada, said most of Canada’s banks emerged stronger after the 2008 financial crisis. He adds the banking system is different, less competitive, and easier to backstop today.