Prediction: These 2 Canadian Bank Stocks Are Next in Line to Pop

Two Canadian bank stocks, one big and one small, are likely to pop following their Q2 fiscal 2024 results and the recent rate cut.

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Editor’s note: A previous version of this article misidentified EQB executive Chadwick Westlake. He is CFO, not CEO. The error has been corrected.

The Bank of Canada’s rate reduction this month and the decent earnings of the top Canadian lenders are compelling reasons to invest in two bank stocks due to pop. The first is a Big Bank, and the second is a smaller but established financial institution.

Market analysts recommend a buy or hold rating for both the Canadian Imperial Bank of Commerce (TSX:CM) and Equitable Bank, or EQB (TSX:EQB). The former yields a hefty 5.4%, while the latter offers a safe and secure 2.1% dividend (14.6% payout ratio).

Lengthy dividend track record

CIBC is Canada’s fifth-largest bank. Like its larger peers, the $63.3 billion bank has paid dividends for over 100 years (156 years and counting). At $66.08 per share, current investors are up 5% year to date. In 2023, the Board approved two dividend hikes, notwithstanding a challenging economic environment.

In Q2 fiscal 2024, revenue and net income increased 8% and 4% year over year respectively to $6.2 billion and $1.8 billion. The provision for credit losses (PCL) rose 17.5% to $514 million compared to Q2 fiscal 2023. Given the 54.1% dividend payout ratio (DPR), the quarterly dividends are well-covered by earnings 

“In the second quarter, the steady execution of our client-focused strategy across our well-diversified North American platform continued to deliver solid results and create value for our stakeholders,” said its President and CEO, Victor G. Dodig. He is confident that with the robust capital position and disciplined risk management, CIBC can navigate the current operating environment and what lies ahead.

Some market analysts say the higher investment and exposure to the Canadian housing market is a deal-buster. However, CIBC’s earnings grew 29% over the past year. Prospective investors should also understand the cyclical nature of the banking industry.

The best part is that the Canadian banking sector is a bedrock of stability. It can go through ups and downs, like during the pandemic, but eventually recovers.    

Momentum for strong performance

EQB, a $3.4 billion digital financial services company, reported better-than-expected results in the first half of fiscal 2024 and should heighten investors’ interest. In the six months ending April 30, 2024, revenue and net income rose 22.5% and 44.6% year over year to $615.4 million and $210.1 million, respectively.

PCL increased 14.3% to $37.7 million versus the same period in fiscal 2023. EQB’s CFO, Chadwick Westlake, said, “The first half of 2024 has been trending to our expectations with strong revenue, earnings growth and ROE well-above target at nearly 16% year-to-date.”    

Westlake believes that EQB has the momentum for strong performance in the back half of fiscal 2024. He also expressed high confidence in the quality of the bank’s credit book and cited the growing long-term value of EQB’s Challenger franchise. At $87.87 per share, the year-to-date gain is 1.3%.

Based on market analysts’ 12-month average price target of $105.30, the stock price could rise 19.8% in one year. In 5 years, EQB’s overall return is 177.1%, representing a 22.6% compound annual growth rate.

Buying opportunities

CIBC and EQB are my top picks in the banking sector. Their recent quarterly results and anticipated inflation easing make them excellent buying opportunities in June.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends EQB. The Motley Fool has a disclosure policy.

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