Canadian bank stocks have long been an essential portfolio anchor for investors, providing security as well as reliable dividend income and growth. But this has never been truer than in the last few years. In fact, Canadian bank stocks have pretty much blown past most expectations in terms of how high they could go and how fast they could get there.
In this article, I’d like to explore this dramatic outperformance and discuss what investors should expect from Canadian bank stocks going forward.
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Canadian bank stocks: Pillars of strength and security
In the last few years, Canadian bank stocks have been some of the best-performing stocks on the TSX. For example, Toronto-Dominion Bank’s (TSX: TD) stock price has increased almost 70% since the end of 2024. Similarly, Royal Bank of Canada’s (TSX: RY) stock price has increased 113% since the end of 2023.
This robust performance is quite unusual for bank stocks, which usually tend to drift higher at a slower, more measured pace. I mean, these are not high-growth stocks. Yet, this stock price performance from the banks is more in line with higher-growth stocks. So, why is this happening?
Why have Canadian bank stocks been so strong?
Answering this question is not easy. But I think it comes down to a few key factors.
Firstly, investors are rewarding security, strength, and stability – and these are the defining characteristics of Canadian banks. Thus, investors are flocking to them, which makes sense as the global economic and political environment has been pretty chaotic. This is driving valuations up above their historical norms.
Secondly, in the last few years, banks have benefited from a positive interest rate environment, strong immigration trends, employment, and a resilient Canadian economy that might have surprised many of us. As a result, banks have continued to post strong earnings, cash flows, and growth. Loan growth, capital markets growth, and wealth management growth have remained strong.
TD Bank
As one of Canada’s top two Canadian banks, TD Bank stock has continued to drive its financials higher as the Canadian banking environment remained strong. In TD Bank stock’s most recent results, the bank posted record earnings of $4.7 billion, or $2.77 per share. This was driven by record revenue in Canadian personal and commercial banking, wealth management, and wholesale banking.
For dividend investors, TD Bank stock is currently yielding 2.6%. This dividend is backed by a well-capitalized, healthy balance sheet and a record of strong growth over time. In fact, TD’s dividend has grown by almost 800% in the last 26 years.
Royal Bank
As Canada’s largest bank, Royal Bank enjoys a strong, diversified business that’s backed by a strong balance sheet. In its latest quarter, Royal Bank stock also broke records, with net income increasing 11% to $6 billion and return on equity (ROE) coming in at a very solid 18%.
Like TD Bank, this Canadian bank’s wealth management and capital markets divisions were also exceptionally strong, as activity and stock markets remained robust. Royal Bank is one of the more expensive banks, trading at 18 times earnings. This can be justified by its higher ROE relative to the Canadian bank peer group.
The bottom line
The rally in Canadian banks has been spectacular, and I believe it has further to run. While valuations are elevated, the combination of record earnings growth, expanding wealth management businesses, and Canada’s position as a safe haven justify premium multiples.
I’m maintaining my full position in TD and would add on any meaningful pullback. For long-term investors without exposure, I’d buy on weakness.
