For many investors, banks stocks are a frightening prospect. In March and April, several U.S. banks failed after a run on deposits wiped out their liquidity. Today, many investors are afraid that the same thing will happen again.
However, if you look closely, you’ll notice that many of the banks that collapsed shared similarities. Most of them were regional banks, and all of them were American banks. Depositors fled them when the collapse of Silicon Valley Bank led to a loss of faith in small banks. Big banks are still doing well.
In this article, I will explore three large TSX banks that should do well in the year ahead.
Toronto-Dominion Bank (TSX:TD) is a Canadian bank that is well known internationally. It has a large U.S. retail business that is well known for its rapid growth. The U.S. segment contributes about 38% of TD’s net income, and it’s still growing.
TD Bank recently withdrew its merger with First Horizon, a very expensive deal that would have cost TD $13.4 billion and caused shareholder equity to decline by $5.9 billion. The offer that TD made for First Horizon was questionable to begin with and began to look really out there when the regional banking crisis got underway. Now that the FHN deal is over, TD will be able to maintain its high liquidity and capital ratios.
EBQ Inc (TSX:EQB) is a small Canadian online bank. It does not operate any branches, instead opting to let depositors open their accounts online. It offers some very high-yield Guaranteed Investment Certificates that are sure to attract depositors.
Whatever EQB is doing seems to be working. Over the last five years, the bank has grown its earnings at 10.8% per year and its revenue at 18% per year. Both figures are well above average for Canadian banks. Its most recent quarterly release beat analyst estimates on revenue and earnings per share. This is definitely a bank worth watching.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS), hereafter referred to as “Scotiabank,” is a Canadian bank that is best known for its large presence in Asia and Latin America.
BNS does not have the best growth track record of all Canadian banks. Over the last five years, it has grown its revenue at just 3.3% per year and its earnings at just 1.3% per year. It has fallen behind its more U.S.-oriented peers. The upside of all this is that the stock has performed so poorly that it now has a 6% dividend yield. So, it could be a good income play.
Two more banks worth mentioning
In addition to the three banks discussed at length above, there are two others worth mentioning briefly.
Royal Bank is Canada’s biggest bank by market cap. It has a much steeper valuation than most of its peers, but it also has a big deal on the horizon: it is acquiring HSBC Canada, a major Canadian branch of a U.K. bank. This deal will add over a billion a year to RY’s net income.
There’s also Bank of Montreal. It recently closed its deal to acquire Bank of the West from BNP Paribas. This deal will boost BMO’s earnings considerably. I think it was a much better deal than TD’s botched FHN deal.