The Bank of Canada (BoC) has rapidly raised interest rates in the last two years. As inflation became a reason for worry in the post-pandemic era due largely to higher energy prices and a loose monetary policy, the central bank started tightening the policy to curb inflationary pressures in 2022. While rising rates helped most lenders increase their net interest income, tough borrowing conditions swelled their provisions for credit losses. This was one of the key reasons why Canadian bank stocks traded on a bearish note in 2022.
While this negative trend in most Canadian bank stocks continued in the first three quarters of 2023, many of them have seen a spectacular recovery in the last few weeks with growing expectations that the BoC and the U.S. Federal Reserve will soon ease their monetary stance. Although interest rates may not go down drastically, the possibility that cooling inflationary pressures may improve the economic outlook in the next year could be the primary reason why financial stocks have rallied of late, making them look attractive to buy as they look cheap based on their long-term growth outlook.
In this article, I’ll highlight two of the best Canadian financial stocks you can buy on the TSX today.
National Bank stock
National Bank of Canada (TSX: NA) is the first attractive financial stock you can consider in December. After declining by 8.6% in the third quarter of the calendar year 2023, NA stock has risen 9.3% in the ongoing quarter. As a result, it now trades with 8.1% year-to-date gains at $98.60 per share and a market cap of $33.3 billion. In addition, the National Bank also offers a decent 4.3% annualized dividend yield at this market price.
In its fiscal year 2023 (ended in October), the bank’s total revenue rose 7.3% YoY (year over year) to $10.66 billion with the help of positive growth in all the key business segments. Despite a tough macroeconomic environment increasing its provisions for credit losses in recent quarters, National Bank’s adjusted earnings for the fiscal year 2023 remained flat on a YoY basis at $9.60 per share but exceeded Bay Street analysts’ expectations of $9.42 per share.
National Bank’s continued focus on tight expense management and organic growth could help it accelerate financial growth in the next year, as the economic outlook gradually improves.
Royal Bank stock
Royal Bank of Canada (TSX: RY) is another top Canadian financial stock that has staged a sharp recovery in recent months. Between January and October 2023, RY stock lost 13% of its value due to challenging the economic environment but has rallied by nearly 19% since then. With this, it now trades at $131.39 per share and a market cap of $183.7 billion. The stock offers a 4.2% annualized dividend yield at the current market price.
In its latest fiscal year ended in October 2023, the largest Canadian bank by market cap registered a 14.6% YoY increase in its total revenue to $56.13 billion. Even as challenging market conditions affected its wealth management segment’s performance, Royal Bank managed to post 1.7% positive YoY growth in its adjusted annual earnings to $11.38 per share, also beating Street’s expectations of $11.21 per share.
As hopes for a brighter economic outlook in 2024 lead to improvements in its wealth management segment performance, it could boost Royal Bank’s financial growth trends, making this financial stock look attractive to buy now.
