Bay Street has gone from bargain bin to velvet rope in a hurry. Canadian financial shares have climbed 22% since February, rewarding anyone brave enough to buy while recession fears, mortgage renewals, and loan losses dominated the conversation. That certainly looks like the easy money has already been made. Look closer, however, and the more durable opportunity may still be ahead.
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Freedom finances
Financial companies now represent 37% of the TSX, up from 31% in March. Meanwhile, Canada’s five largest bank stocks trade at an average of roughly 15 times forward earnings, compared with 12 times for their largest American peers. The sector is no longer cheap simply because the logos look reassuringly familiar.
A bank stock delivers returns in two main ways. Its valuation can rise as investors become more optimistic, and its earnings can grow as lending, fees, and wealth-management assets expand. The first engine powered much of the recent rally. From here, profits and dividends will need to do more of the heavy lifting.
A running rally
The good news is that earnings have arrived wearing work boots. Canada’s major banks have reported consecutive quarters of double-digit growth, helped by resilient borrowers, stronger trading revenue, renewed investment-banking activity, and fewer credit losses than investors feared. Banks also built sizeable reserves during the gloomy period, potentially creating room to release some of those provisions if conditions continue improving.
Investors shouldn’t respond by stuffing every bank stock into their portfolios like cash into a mattress. Valuations leave less room for disappointment, making earnings quality especially important. A diversified portfolio of Canadian blue-chip stocks remains sensible, while reinvesting payments from strong Canadian dividend stocks can turn modest quarterly income into serious long-term wealth. Among the banks, Canadian Imperial Bank of Commerce (TSX: CM) offers an intriguing balance.
Room to run
CIBC operates Canadian and U.S. personal banking, commercial banking, wealth management, and capital markets businesses. That mix lets it earn interest from loans while collecting fees from trading, advice, and asset management. It’s considerably more interesting than simply holding Canadians’ chequing accounts and charging them $16.95 for the privilege.
The latest results support that broader story. Adjusted earnings per share (EPS) climbed 24% year over year during the second quarter, while CIBC stock maintained a strong 13.6% common equity tier-one ratio. This capital cushion helps absorb unexpected losses while supporting lending, dividends, and share repurchases. Its quarterly dividend of $1.07 currently provides a yield of roughly 2.6% at writing, adding income while investors wait for earnings to compound.
CIBC stock also agreed to sell its majority interest in CIBC Caribbean for approximately US$1.6 billion. The deal should free up capital for North American growth and accompany a planned share-buyback program. Fewer shares can mean more earnings per remaining share, provided management doesn’t get carried away paying premium prices for its own stock.
Foolish takeaway
CIBC stock sits close to its 52-week high, so another weak economic forecast could knock some enthusiasm loose. Higher unemployment or mortgage stress could also increase credit losses, while the recent surge in capital-markets income may normalize. Those risks make buying gradually more attractive than sprinting after the rally with both shoelaces untied.
The fast money came from falling fear. The easier long-term money may come from owning a bank whose profits, dividends, and share count keep moving in the right direction. CIBC stock doesn’t need another dramatic revaluation to reward patient shareholders. It simply needs to keep earning more, returning capital, and letting time handle the rest.
