Which Canadian Bank Stock is the Best Buy?

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Banks in Canada were impacted by the U.S. banking crisis this past spring, but more so from negative investor sentiment toward banks than the particular issues that brought down some U.S. banks and hampered many others.

The fact is, the Canadian banking industry has held up well through these tough times, as it is dominated by a half-dozen large, well-capitalized banks. Five of them trade on the New York Stock Exchange: the Royal Bank of Canada (NYSE:RY), Toronto Dominion Bank (NYSE:TD), Bank of Montreal (NYSE:BMO), Bank of Nova Scotia (NYSE:BNS), and the Canadian Imperial Bank of Commerce (NYSE:CM).

Of course, some of these banks have fared better than others, but one of them stands out as the best of the bunch. It’s the Canadian Imperial Bank of Commerce, more commonly known as CIBC. Here’s why.

CIBC stands out

Of the five major banks, CIBC is the only one with a positive return year to date, up by about 2% for the year. It is also one of just two that beat analysts’ estimates in the most recent quarter.

Note: all dollar amounts are in Canadian dollars.

This was bank earnings week in Canada, and CIBC posted revenue of $5.8 billion in its fourth fiscal quarter, up 8% year over year and flat compared to the previous quarter. Further, it had net income of $1.5 billion, or $1.53 per share, up 25% year over year and 4% from the previous quarter.

CIBC also boosted its return on equity from 10.1% a year ago this quarter to 11.8%, and its capital remained strong, with a Common Equity Tier 1 (CET1) ratio of 12.4%, up from 11.7% a year ago. The CET1 ratio is a measure of liquidity, and CIBC has far more than the regulatory requirement.

For the full year, the bank’s revenue was up 7% to $23.3 billion, but its net income was down to about $5 billion from $6.2 billion the previous year. A big reason was the much higher provision for credit losses.

In FY 2023, CIBC set aside $2 billion for credit losses, compared to just over $1 billion a year ago. This took a big chunk out of earnings, but what was promising in the fourth quarter was that the provision was just $541 million, down from $736 million the previous quarter.

The lower provision helped CIBC beat earnings estimates in the fourth quarter. Additionally, a declining number means that credit quality is improving, as fewer customers are struggling to pay on their loans.

CIBC was also able to lower its non-interest expenses on a year-over-year basis in the quarter, stemming from cost-cutting initiatives that saw the number of full-time employees reduced by more than 2,000.

This helped the bank reduce its overall efficiency ratio to 58.9% from 64.6% a year ago. In its Canadian consumer banking group, the efficiency ratio dropped to 53.2% from 58%. The lower the efficiency ratio the better, as that means the company is spending less to generate revenue.

Huge dividend

While the Canadian banking business is its largest segment, CIBC saw solid growth last year in Canadian wealth management and capital markets, both of which saw pre-provision earnings gains. These are two areas that the company plans to focus on in the year ahead.

“We enter the new fiscal year with a robust balance sheet and strong credit quality, foundational to our progress as we enable and simplify our bank, focus on driving growth in the mass affluent and private wealth segments, build on our strength in digital, and leverage our connected culture to grow our commercial and capital markets business,” CIBC President and CEO Victor Dodig said in the earnings report.

The other thing that really stands out about CIBC is its dividend, which it bumped up to 90 cents per share from 87 cents per share the previous quarter. The dividend comes with a robust 6.2% yield. This is the seventh straight year of dividend increases for CIBC, and it has a manageable payout ratio.

Finally, CIBC is reasonably valued with a forward price-to-earnings (P/E) ratio of 8.4 and a price-to-book (P/B) ratio of 1.09.

The Canadian economy is expected to slow in 2024, and the outlook is not much better for 2025, so don’t expect big returns. However, with its efficiency, growth trends and strong balance sheet, CIBC should be able to meet its three-year goal of high-single-digit annual earnings growth and beat most of its peers. Additionally, the stock looks even better when you consider the dividend.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.