The Best Canadian Bank Stocks to Buy in September 2022

Posted on September 22, 2022 by Dan Kent

Whether you're a seasoned investor or someone who is just learning how to buy stocks in Canada, most Canadian retail investors will have one thing in common when it comes to their portfolios; they include Canadian bank stocks.

Why?

For starters, every one of these banks on this list is a Canadian Dividend Aristocrat, and is also included in the large majority of Canadian index funds. Newcomers are often drawn to bank stocks, primarily because of their consistent, high-paying dividends.

Are Canadian banks a good buy now?

Historically there hasn't really been a "poor" time to buy into these blue-chip giants or add to your position. Canadian investors witnessed the banks go through a large bull run in late 2021, primarily because of the rumors of rising interest rates.

However, what was then a tailwind has now turned into a headwind, and nearly 75% of the way through 2022, Canadian banks have struggled. Rates are increasing at a pace that could potentially lead to a recession, and ultimately the market doesn't like it.

However, this just means we'll be able to grab our favorite bank stocks on the TSX for even cheaper. I've owned the Canadian banks for the entirety of my investing career, and regardless of whether or not they're going through a large bull run or dip, I'll be adding consistently.

How safe are Canadian bank stocks?

The highly regulated Canadian banking market creates massive barriers to entry. This is similar to the Canadian telecom sector.

The Big 5 are incredibly important to the economy in Canada, as are some of the smaller regional players such as the National Bank of Canada (NA) and Canadian Western Bank (CWB). Not only do they deal with wealth management for clients, but investment banking, mortgages, personal banking, car loans, and so much more. They are vital to a healthy economy.

A Canadian bank stock can serve as a cornerstone of one’s portfolio, is low-risk, and provides growth and a steady income.

After weathering the financial crisis better than most all world banks, the banks in Canada were also among the first to re-instate a rising dividend. In fact, the Bank of Montreal has one of the longest consecutive dividend payment streaks in the country, paying dividends since the early 1800s.

How to value Canadian bank stocks

One of the most reliable ways to value Canada’s banks is to compare their current stock prices against historical averages. Whether they are traded at a discount or premium to historical and forward P/E averages, they have always returned to the mean.

So with that being said, let’s get to the best Canadian bank stocks to buy moving forward.

What are the best Canadian bank stocks to own today?

6. Goeasy Ltd (TSE:GSY)

For the most part, this list is constructed of major Canadian banks. They're simply the best bank stocks in the country. However, as an added bonus we've put a very strong alternative lender here in Canada on the list in Goeasy Ltd (TSE:GSY).

Alternative lenders have exploded in popularity as of late, as many Canadians are rejected from major banks and need to head to smaller institutions to gain access to capital.

This does give the impression that Goeasy's customer base is extremely high risk, but this just isn't true. 

 In fact, the majority of Goeasy's customer base actually has lower debt loads than those of major banks. Why? Well, they don't have mortgages. Which in the vast majority of cases is going to be the number one priority in terms of payment for any Canadian.

So what exactly does Goeasy do? The company provides financing options to purchase furniture, electronics, appliances, and also provides unsecured loans to customers who just need cash. It has two primary segments, easyhome and easyfinancial, with easyfinancial making up the lion's share of the company's revenue.

Despite rising rates, they still remain quite low and Canadians can borrow for extremely cheap. This is causing some exceptional boosts to the company's top and bottom line.

In terms of dividend growth, the company is outstanding. Over the last 5 years, the company has grown the dividend by more than 38% annually. The company is a Canadian Dividend Aristocrat, and with a dividend payout ratio in the mid-teens, it has plenty of room to grow the dividend in the future.

In late 2021 and early 2022, the company underwent a significant correction in price. It's important to note that although Goeasy is well-capitalized, has an outstanding balance sheet, and is profitable, it's still susceptible to much more volatility than the other major banks on this list.

With a beta of over 2, this company is likely to outperform the markets when they're rising but will underperform in times of volatility.

5. Canadian Imperial Bank of Commerce (TSE:CM)

CIBC (TSE:CM) has been a perennial under-performer but makes the cut on this list update over Scotiabank.

Prior to the large correction in Canadian financials, CIBC was one of the best-performing bank stocks in the country. This was certainly a rarity, as the company has often struggled compared to its peers. 

However, I believe that the company's reliance on the Canadian economy and fears of a housing bubble and recession have caused it to give back a lot of its gains. 

It just doesn't have the international exposure all of the other major banks on this list do. It's certainly making steps, but it isn't there just yet.

The company is expected to post earnings per share of $7.40~ in 2022, which would mark low single-digit earnings growth. Although it had a torrent run in 2021 and the start of 2022, it looks like analysts may see this bank cooling down moving forward. Many other options on this list are expected to post much higher earnings growth moving forward.

In terms of valuation, over the last half-decade, this company has typically traded in the 10.2x range in terms of price to earnings. At the time of writing, it's currently trading at a slight discount to that valuation.

Also worth noting, CIBC also boasts the largest dividend yield on this list, in the high 4% range. Typically, CIBC sports one of the highest yields among its peers, and this time is no different.

In 2021, CIBC had one of the higher payout ratios among its peers in the 60% range. However, this has come down considerably, and the company is now paying out only 40%~ of trailing twelve-month earnings towards the dividend.

The company's average payout ratio over the last 5 years has been around 45%. So, this could be a sign of more dividend growth for CIBC. However, it's important we keep an eye on the earnings growth of the company as well, as low single-digit increases in earnings won't support inflation-beating dividend growth for very long.

4. Bank of Montreal (TSE:BMO)

During the pandemic, the Bank of Montreal (TSE:BMO) was the hardest hit bank. In fact, for most of 2020, the bank trailed its peers.

That is until the markets recognized it was significantly undervalued and it quickly became one of the best performing banks.

The Bank of Montreal is one of the top ten largest banks in North America and has paid uninterrupted dividends since the early 1800's, the longest streak in the country.

The majority of its revenue comes from the Canadian economy, making it one of the more heavily dependent Canadian bank stocks when it comes to its home country. However, it does have strong (and growing) exposure south of the border as well.

Despite its strong exposure to Canada, it is key to note that the company also has the lowest exposure to the Canadian housing market, a market that a lot of investors think is a bubble just waiting to burst.

Furthermore, the Bank of Montreal has been one of the most consistent performers among all of Canada’s banks. In fact, the company's exceptional performance over the last few years has caused it to make up significant ground. As a result, it is the second best performing Canadian bank over the last 3, 5, and ten-year periods, trailing only National Bank.

Despite its exceptional performance, the company is still trading below its 3, 5, and 10-year historical averages at the time of writing. And, the company is expected to be one of the fastest-growing banks on this list, with earnings projected to hit $15 per share in 2024, which would represent 18% growth from Fiscal 2021.

These earnings projections are certainly factoring in a recession. If we do manage a soft-landing here in Canada and the US, we have no doubt they'd be revised upwards.

3. Toronto Dominion Bank (TSE:TD)

Toronto Dominion Bank (TSE:TD) is a multinational banking and financial services firm that started operations in 1855. TD Bank is one of the largest banks in Canada by total assets and the second largest by market capitalization.

The financial giant was named one of the most convenient banks in the U.S. and is among the top brands in North America.

The company has a $155B+ market cap and the highest exposure south of the border as more than 40% of revenue comes from the U.S. 

Over the last half-decade, TD Bank has averaged high-single-digit earnings growth. This is one of the best growth rates among the Big 5 Banks and also includes the pandemic-stricken 2020.

This is one of the primary reasons TD Bank has been able to grow its dividend at a rapid pace and owns the highest dividend growth rate of its peers. In late 2021 and early 2022, TD Bank was the best performing bank stock by a landslide. However, it cooled down once it announced its largest acquisition in history, an all-cash deal for First Horizon.

The $13.4B deal will expand the company's footprint in the United States and over the long term, will likely prove beneficial for shareholders. However, dividend investors are fickle, and likely see this as a sign dividend growth will slow in the near term.

However, if you're an investor that aims for total return, don’t sleep on TD Bank as its exposure to the U.S. can lead to outperformance as our neighbors have had a much more successful economic reopening and the acquisition of First Horizon simply gives the company more exposure south of the border.

At the time of writing, the company is trading at a double-digit discount to historical averages.

2. National Bank (TSE:NA)

National Bank (TSE:NA) is dominating in terms of market share in Quebec, with over 60% of its revenue coming from the Canadian province. The bank also depends heavily on personal and commercial banking, making up over 40% of its total revenue.

However, it's important to note that National Bank does have a strong and growing international presence as well. The company often gets lumped in with Laurentian Bank (TSE:LB). However, in our opinion, this is a much better quality company.

Although it's smaller than Canada's major institutions, glass-half-full investors will realize this is a prime opportunity to grab a growth stock in the banking sector, which is an extremely rare occurrence.

Over the last 5 years, National Bank (dividends accounted for) has returned 107.2% to investors at the time of writing. The next closest bank? Bank of Montreal at 80%. For the most part, studies around Big Bank valuations have not included National Bank. However, National Bank’s stock reacts in the same way as the big five.

When it trades below historical averages, it always returns to the mean. The opposite is also true, when it trades above historical averages it always drops to trade in line with historical averages.

After a recent correction, the company is now trading at a discount to its historical valuations. However, it will be interesting to see if the company will revert back to the norm, as analysts are expecting slowing growth. This is something we're certainly not used to seeing.

A company that routinely posted high single-digit growth is only expected to grow earnings by about 10% through 2024. This is one of the lower growth rates on this list and might be why the market is giving it a lower valuation.

The lower projected growth rates are quite possibly from the company having large exposure to the Canadian economy, an economy that is projected to see some significant slowdowns in growth if a recession were to occur.

However, as we’ve mentioned before the company has defied expectations and has led all of Canada’s banks despite having only average growth rates.

1. The Royal Bank of Canada (TSX:RY)

Our position on the Royal Bank of Canada (TSE:RY) hasn’t changed – it remains the top bank in the country.

It continues to perform and was one of the few that managed to grow the top line (revenue) YoY despite the pandemic.

It is one of the most diversified banks in the world, and its global exposure allowed it to provide stable revenue and earnings as multiple countries were in different phases of economic recovery due to COVID-19. Although the pandemic is mostly behind us, this could still play out to be a tailwind in 2022 due to recession fears.

When we compare Royal Bank to the other Big 5 banks here in Canada over the last half-decade, its performance has been right around average.

It has outperformed lagging banks like Bank of Nova Scotia and Canadian Imperial Bank of Commerce but has been outperformed by the high-growth options in Bank of Montreal and National Bank.

Keep in mind, considering this is the largest company in the country, we can't expect it to keep pace with the growth of a smaller, more regional player in National Bank. But, that certainly doesn't make it a poor investment.

The same valuation principles apply to Royal Bank as we've discussed with many other banks on this list. And as of right now, it's trading at a small discount to historical averages.

All things considered, RBC looks to be fairly valued here. This means that it should simply perform in line with expectations. The company is expected to put up mid-single-digit revenue and EPS growth over the next few years.

Given its size and status as the largest company in the country, Royal Bank provides unparalleled safety. It is one of those rare stocks that you can buy at any point. While you don’t necessarily want to overpay, today the company is well priced and should continue to do well for years to come.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Qtrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.

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