If the broader economy tumbles next year, bank stocks will be the first to catch a cold. And we got a little preview of the same this year, with bank names tanking 12-15% from their record highs. But not all of the Big Six Canadian banks are equally exposed to macro challenges.
Canadian bank stocks and macro challenges
For the fiscal fourth quarter (Q4) of 2022, Canadian banks saw earnings growth slowing for some and higher provisioning for many. The provisions will likely trend higher for the next few quarters, given the impending rate hikes and roaring inflation.
Nearly all Big Six Canadian banks are fundamentally strong and have created a decent shareholder value over the long term. Currently, the average dividend yield investors can get around is 4.5%, which is fairly good in the current uncertain market.
I like Toronto-Dominion Bank (TSX:TD) better. It’s not that its dividends are superior and it’s cheap valuation-wise. However, its healthy credit profile and significant presence in the U.S. differentiate it from its peers. Itâs retail banking south of the border could really be the growth driver in the long term.
How did Toronto-Dominion Bank fare in fiscal Q4 2022?
For the recently reported quarter, TD reported a net income of $17.4 billion, a decent 22% growth year over year. Average deposit volumes grew by 4% during the quarter compared to the fiscal Q4 2021. Its common equity tier-one (CET1) ratio was around 16.2% at the end of October 31, 2022. Thatâs much higher than the regulatory requirements and even peersâ average. Peer Royal Bank has it around 12% and Bank of Montreal at 16.7%.
Itâs not like TD has stood strong on all the above parametres in the recent quarter compared to peers. However, the numbers indeed represent its business strength in the challenging environment.
In the last 10 years, TD has managed to grow its earnings by 9% compounded annually. Its return on equity averaged around 15% in the last 10 years. This stable earnings growth was well reflected in its stock, returning 13% compounded annually in the same period. In comparison, the Big Six, on average, returned 11.5%.
After a decent quarterly performance, TD increased its dividend by 8%, taking its yield to 4.2%. It aims to grow its normalized earnings by 7-10% next year. This looks achievable as its U.S. arm is growing much faster than its Canadian operations. Plus, we might see some respite on the provisions front, probably in the second half of 2023, uplifting banksâ bottom line.
TD stock is trading 17% lower from its 52-week highs early this year. It looks well placed for the long term with its scale and earnings stability. It is currently trading at a price-to-book value ratio of 1.6, which is marginally higher than peers. However, TDâs premium valuation looks justified and suggests investorsâ above-average expectations from it.
As target inflation is still a distant dream for central banks, we might see more interest rate hikes next year. This might weigh on Canadian bank stocks, and a meaningful recovery could be delayed. TD stock looks attractive for the long term, given its financial strength, stable dividends, and strong execution.
The post Screening Canadian Bank Stocks? Hereâs Your Best Bet for 2023 appeared first on The Motley Fool Canada.
Before you consider TD Bank, you’ll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in December 2022 … and TD Bank wasn’t on the list.
The online investing service they’ve run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 16 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks
* Returns as of 12/13/22
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#fff’);
- Should You Buy BMO Stock or TD Stock for U.S. Exposure?
- How I’d Invest $50,000 in TSX Dividend Stocks for Retirement, If I Had to Start From Scratch
- The Big Banks Predict Just a “Mild” Recession: Is it Safe to Buy Bank Stocks?
- Passive Income: Should You Buy TD Stock or Enbridge?
- TD Bank Stock Looks Too Good to Pass Up!