Financial stocks generally trend higher when interest rates are rising. Unfortunately, Canadian bank stocks, especially the big banks, failed to deliver in 2023 amid with rising rates. The stock performances were below par because the provision for credit losses (PCLs) spiked instead of earnings.
The Bank of Canada’s aggressive rate-hike campaign since March 2022 was a bane to financial institutions and bad news for consumers. Borrowing costs have risen very high, while loan activity and demand have reduced significantly. Some market analysts warn homeowners” have yet to feel the impact of higher mortgage costs.
The winning bank stock is not even a Big Six bank regarding year-to-date performances. All the giant lenders, from Royal Bank of Canada to National Bank of Canada (TSX:NA), are in negative territory. Meanwhile, Canadian Western Bank (TSX:CWB) defies the downtrend. The mid-cap bank stock outperforms the financial sector (-3.79%) and the TSX (+0.40%) with its 20.73% gain.
CWB has an impressive run from last year. At $28 per share, the one-year price return is 34.65%. Unlike the broader market’s roller-coaster ride, this bank stock hasn’t faltered but gained 18.76% in six months and 7.77% in three months. The dividend yield is attractive (4.71%), while the dividends are safe (38.79% payout ratio).
In the third quarter (Q3) of fiscal 2023, the $2.7 billion regional bank raised its PCL by 19.44% to $129 million, although adjusted common shares net income rose 2% year over year to $84.37 million. Notably, CWB wealth management’s revenue grew 52% compared to a year ago.
Its president and chief executive officer (CEO), Chris Fowler, said the bank’s strategic focus to meet the full-service financial needs of businesses and owners is a differentiating factor. While CWB will continue to target lending opportunities that provide strong returns within a prudent risk appetite, it projects mid-single-digit loan growth for the rest of fiscal 2023.
Big bank standout
National Bank of Canada is the logical choice if you want to stay invested in the sector’s big guns. At $87.74 per share, the sixth-largest bank is down by only 0.69% year to date and offers a lucrative 4.65% dividend.
Like its larger peers, the $29.67 billion lender had to set aside more money in case of loan defaults. In Q3 fiscal 2023, NA’s PCL rose 95% to $111 million versus Q3 fiscal 2022. The effect was a 4% year-over-year decline in profit to $790 million.
Its CEO, Laurent Ferreira, said the quarterly earnings were solid but notes the less constructive backdrop in the financial markets segment. He added, “The Canadian economy has yet to absorb the full impacts of rate hikes since the start of monetary policy tightening, resulting in lingering uncertainty.”
“With the environment expected to remain challenging in the near term, we continue to be strategic in prioritizing and managing expenses,” said Marie Chantal Gingras, chief financial officer at NA. Also, there’s no plan for widespread job cuts.
Economic growth is coming
The current operating environment has been harsh for the banking industry. Bankers said higher interest rates would continue to weaken economic growth. However, they expect the Canadian economy to bounce back in the second half of 2024. Expect CWB to shine brighter, while the big banks, including NA, should return to investors’ favour.