Skip to main content
Access every election story that matters
Enjoy unlimited digital access
per week for 24 weeks
Access every election story that matters
Enjoy unlimited digital access
per week
for 24 weeks
// //

Bank towers are shown from Bay Street in Toronto's financial district, on Wednesday, June 16, 2010.

Adrien Vecza

In the past couple of years, Canadian bank stocks have powered through concerns about energy loans, new regulations for the domestic housing market, rising competition from technology companies and short-selling activity by U.S. investors.

The sector rose 11 per cent in 2017, not including big dividends, which was nearly double the gain for the S&P/TSX composite index.

Bank stocks have continued to rally this month, hitting fresh record highs as recently as Friday.

Story continues below advertisement

What should investors expect now?

Although buying Canadian bank stocks on dips works particularly well, these cash-gushers still look compelling at today's elevated levels and they stand out in a market that isn't exactly screaming with bargains.

Robert Sedran, an analyst at CIBC World Markets, outlined several factors that should drive bank profits up by an average of 7 per cent in 2018 (on a per-share basis). And while some of these factors are being baked into share prices as you read this, others are more theoretical and intriguing to long-term investors.

Let's start with the intriguing stuff.

Big banks are often criticized for their huge branch networks, which are costly and look out of place when consumers are performing so many transactions online.

But banks can shrink or close branches, raising efficiency.

"Fewer employees and less total square footage translate to savings on salaries and rent," Mr. Sedran said in a note.

Story continues below advertisement

The analyst compared bank branches in Canada to those in Sweden, a country with a similar urban-rural population figure and bank concentration, but higher smartphone adoption and better cashless-payment infrastructure.

In other words, Sweden today is where Canada may be headed.

If the population count for every branch in large Canadian cities falls into line with the ratio in Stockholm, the total number of Canadian branches could fall by nearly 500.

"We see the branch network as but one of many areas where Canadian banks will find additional savings in the years to come," Mr. Sedran said.

These savings can be meaningful to the bottom line. The analyst estimated that good performance on expenses can turn a year with 5 per cent revenue growth into profit growth of 7 per cent to 8 per cent.

If cost-cutting sounds defensive, there are other reasons to stick with banks.

Story continues below advertisement

Years of tighter financial regulations have forced banks to sit on bigger cash reserves: Their common equity tier 1 capital ratios approached 11 per cent in the fourth quarter of 2017, up from 8 per cent in 2012.

This larger buffer will make banks safer during downturns. But during good times, it has held back return on equity ratios, dividend increases, share buybacks and acquisitions.

Now, with capital ratios above the minimum thresholds expected by regulators, banks are becoming more generous to shareholders, and the trend should continue.

According to Mr. Sedran, the Big Six banks in 2017 distributed 60 per cent of their total profits to shareholders, in the form of dividends and share buybacks. That is the highest rate since the financial crisis.

Take Toronto-Dominion Bank as an example. Not only did TD spend $1.6-billion on Scottrade Bank and repurchase $1.9-billion worth of shares, it also invested in technology, boosted its dividend and raised its capital levels.

"We believe this underscores the flexibility and deployment potential of each bank and we expect this flexibility to be on display in fiscal 2018," Mr. Sedran said.

Story continues below advertisement

Meanwhile, the economic backdrop remains favourable. Canadian and U.S. interest rates are on the rise, which increases the profitability of bank loans.

Mr. Sedran expects that lending net interest income will rise by an average of 8 per cent among large banks in 2018, up from 6.6-per-cent growth in 2017.

And finally, valuations look reasonable, if not exactly cheap.

According to RBC Dominion Securities, the Big Six banks trade at 1.8-times book value, or in line with the 10-year average.

The average estimated price-to-earnings ratio is 11.8, which is above the 10-year average of 10.9, but still below the peak of 13.3.

If that's not a compelling reason alone to buy Canadian bank stocks right now, it gives investors a good reason to stay put.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to
Comments are closed

We have closed comments on this story for legal reasons or for abuse. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies