Canadian Bank Stocks: Buy, Sell, or Hold?

Canadian bank stocks are rock-solid investments, but one is a no-brainer buy following the recent interest rate cut.

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The Bank of Canada’s rate cut announcement on June 5, 2024, was a significant development for the stock market, lenders, and borrowers. It also came after Canadian banks presented their second-quarter (Q2) fiscal 2024 earnings results. Some market analysts say a lower benchmark rate could lift share prices, especially for financial stocks.

The giant lenders impressed investors with their positive quarterly results, but the smaller lenders did not. For anyone taking a position today, National Bank of Canada (TSX:NA) is the best buy among the big bank stocks. However, if I’m selling a bank stock, I’d ditch Canadian Western Bank (TSX:CWB).

On June 14, 2024, BNN Bloomberg reported that National Bank of Canada plans to acquire Canadian Western Bank for about $5 billion in an all-stock deal. Barring any hurdles, the transaction could lead to further consolidation in Canada’s banking industry.

Top performer

National Bank is the top-performing big bank stock thus far in 2024. At $117.67 per share, current investors delight in the 18.71% year-to-date gain and partake in the 3.74% dividend. As of this writing, Canada’s sixth-largest bank outperforms its larger peers.

Its president and chief executive officer (CEO), Laurent Ferreira, said the solid financial results for Q2 fiscal 2024 reflect management’s disciplined execution of its strategy across business segments. More importantly, it showed the earnings power of the $39.8 billion bank.

In the three months ending April 30, 2024, total revenues and net income increased 12.4% and 8.9% to $2.75 billion and $906 million compared to Q2 fiscal 2023. For the first half of the year, total revenues and net income rose 9% and 7% year over year to $5.5 billion and $1.8 billion, respectively.

National Bank’s provision for credit losses (PCL) climbed 50.88% to $258 million from a year ago. The board of directors declared and rewarded investors with a 4% dividend hike. Concentrating on the more stable domestic market contributed to the better-than-expected financial performance. Like the Bank of Canada, the bank reduced its prime rate by 25 basis points.

Rebound in the second half of fiscal 2024  

Canadian Western Bank trades at a discount if you invest today. At $25.17 per share, the year-to-date loss is 16.35%, while the dividend offer is a juicy 5.58%. The $2.4 billion regional bank provides personal banking, specialized financing, comprehensive wealth management, and trust services.

In Q2 fiscal 2024, common shareholders’ net income declined 9% to $76 million, while PCL on total loans as a percentage of average loans rose 14 basis points versus Q2 fiscal 2023. On a year-to-date basis (six months), the common shareholders’ net income was flat at $164 million.

“Through the first half of the year, we have delivered a slower pace of loan growth than we originally anticipated which has dampened our full year revenue expectations and reduced our outlook for annual adjusted earnings per common share,” said Chris Fowler, president and CEO of CWB.

Nonetheless, Fowler assures that CWB is well-positioned to increase its loan growth through the second half of the fiscal year. The board of directors approved a 6% dividend hike despite the lower quarterly earnings.

Solid choices

National Bank of Canada is a no-brainer buy following the interest rate cut. Investors’ reception to Canadian Western Bank’s latest quarterly results was negative. However, income investors might not sell CWB due to its Dividend Aristocrat status. No big bank can match the 31-year dividend-growth streak.     

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 Canadian Western Bank. The Motley Fool has a disclosure policy.

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