Investing in financial stocks is like planting a tree in fertile soil. It’s a choice that often grows strong and resilient with time. Financial institutions like banks, insurance companies, and asset management firms are foundational to the economy, handling everything from loans and mortgages to insurance and investments. This makes the business models essential, reliable, and profitable, translating into enticing opportunities for investors. So today, let’s look at three strong options for investors to consider.
Royal Bank
Let’s start with the Royal Bank of Canada (TSX:RY), the largest bank in Canada with a staggering market capitalization of $248.6 billion as of July 31, 2024. RBC’s third-quarter results for 2024 were impressive, with net income reaching $4.5 billion – year-over-year growth of 16.2%.
This increase was fuelled by lower provisions for credit losses and earnings from its recent acquisition of HSBC’s Canadian operations. RBC’s personal and commercial banking segment enjoyed a 17% rise in earnings, reflecting higher loan and deposit volumes, while its capital markets division surged by 23% thanks to a resurgence in mergers and acquisitions. With a Common Equity Tier 1 (CET1) ratio of 13%, RBC demonstrates a robust ability to manage economic uncertainties while maintaining healthy capital reserves.
Fairfax
Fairfax Financial Holdings (TSX:FFH), on the other hand, represents a blend of insurance expertise and savvy investment strategy. This Toronto-based company reported remarkable third-quarter results in 2024, with net earnings of USD$1 billion, driven by strong underwriting results and gains on investments.
Fairfax’s book value per share rose by 11.7% year-to-date, reaching USD$1,033.18, a testament to its operational efficiency and financial strength. Its insurance operations achieved a combined ratio of 93.9%, highlighting effective cost management, while gross premiums written grew by 13.9%, thanks in part to the acquisition of Gulf Insurance. With a strong cash position and notable gains in its investment portfolio, Fairfax is a compelling choice for those looking for growth backed by solid fundamentals.
iA Financial
iA Financial (TSX:IAG) rounds out this trio, offering a unique focus on insurance and wealth management. As of September 30, 2024, iA Financial boasted a market capitalization of $12.6 billion. The financial stock has been on a growth streak, with a profit margin of 11% and an impressive return on equity of 13.8%.
The financial stock’s revenue surged by 34.4% year-over-year in its most recent quarter, driven by strong sales and effective cost controls. Its earnings per share (EPS) grew to $9.88, marking a 414.3% increase compared to the previous year – a clear signal of its growing profitability. The financial stock’s diversified product offerings and expanding market share position it as a long-term winner in the financial sector.
A winning combination
So why are these three financial stocks top choices for investors? Each combine the stability of core operations with growth opportunities that make them stand out in the competitive financial sector. RBC’s strong banking operations and strategic acquisitions ensure a steady income stream and growth potential. Fairfax leverages its insurance expertise and investment prowess to deliver impressive results. While iA Financial capitalizes on its dual focus on insurance and wealth management to carve out a niche in the Canadian market.
Looking forward, all three companies are well-positioned to thrive. RBC’s acquisition of HSBC Canada is expected to drive earnings for years, while its strong CET1 ratio provides flexibility for future growth opportunities. Fairfax continues to expand its footprint in global insurance markets and achieve substantial investment returns, thus making it a unique hybrid of a financial and an investment company. Meanwhile, iA Financial’s focus on profitability and market share growth ensures it remains a dominant player, especially in the Canadian insurance and wealth management industries.
Bottom line
Investing in financial stocks offers a dual advantage – a reliable source of passive income through dividends and long-term growth – fuelled by the economy’s ever-present need for banking, insurance, and investment services. With recent stellar performances, promising outlooks, and robust financial health, RY, FFH, and IAG stand out as excellent choices, especially for investors looking to add some Canadian financial strength to their portfolios.
