Canadian Big Five Banks Performance Comparison: CM Leads in Profit Growth, BNS with Highest Dividend Yield | Moomoo Research

Recently, Canada's five major banks have successively released their financial reports for the third quarter of 2024. Overall, under the wave of interest rate cuts, the performance of the banks varies, and the changes in credit loss provisions have had varying degrees of impact on their net profit performance. Royal Bank of Canada (RY) and Canadian Imperial Bank of Commerce (CM) have outperformed expectations, while Bank of Nova Scotia (BNS) has exceeded revenue expectations but seen a decline in profits. Bank of Montreal (BMO) and Toronto-Dominion Bank (TD) have underperformed expectations.

Next, we will compare and analyze the specific financial report performance and dividend yields of each bank to see which bank will emerge victorious in the wave of interest rate cuts.

Figure：Key Profitability Metrics for Canada’s Big Five Banks in Q3 2024

Source: Moomoo Research

Bank of Montreal (BMO) did not meet expectations in its Q3 2024 performance, with operating income of CAD 8.192 billion, a year-over-year increase of 1.70%; net interest income was CAD 4.794 billion, a year-over-year decrease of 2.26%; non-interest income was CAD 3.398 billion, a year-over-year increase of 6.60%. The provision for credit losses was CAD 906 million, an increase of 84.15% year over year. Due to the high-interest-rate environment, the provision for credit losses nearly doubled, significantly exceeding expectations and dragging down its business income. Net profit was CAD 1.865 billion, a year-over-year increase of 19.32%, maintaining good growth. Although earnings per share (EPS) were CAD 2.48, an increase from the previous value of CAD 2.12, the EPS was below market expectations due to the increase in credit loss provisions.

Bank of Nova Scotia (BNS) had an excellent Q3 2024 revenue performance, exceeding expectations. Operating income was CAD 8.453 billion, a year-over-year increase of 5.50%; net interest income was CAD 4.862 billion, a year-over-year increase of 6.32%; non-interest income was CAD 3.591 billion, a year-over-year increase of 4.42%, driving steady revenue growth. However, the provision for credit losses was CAD 1.052 billion, a year-over-year increase of 28.45%; net profit was CAD 1.756 billion, a year-over-year decrease of 15.05%. The continued high-interest-rate environment continues to affect retail business, increasing credit costs, which has become an important factor affecting the decline in profits.

Royal Bank of Canada (RY) exceeded expectations in Q3 2024, mainly due to the acquisition of HSBC's Canadian business. Operating income was CAD 14.688 billion, a year-over-year increase of 13.67%; net interest income was CAD 7.327 billion, a year-over-year increase of 16.56%; non-interest income was CAD 7.361 billion, a year-over-year increase of 10.93%. Royal Bank of Canada stated that the performance improvement in personal and commercial banking, capital markets, and wealth management partially offset the decline in corporate support and insurance business performance. The inclusion of HSBC's Canadian branch performance boosted net profit by CAD 239 million, with a total net profit increase of 16.20% year over year, rising to CAD 4.483 billion. The provision for credit losses was CAD 659 million, a year-over-year increase of 6.98%, showing stable operations and strong risk resistance.

Canadian Imperial Bank of Commerce (CM) exceeded expectations in Q3 2024, with operating income of CAD 6.604 billion, a year-over-year increase of 13%; net interest income was CAD 3.532 billion, a year-over-year increase of 9%, and non-interest income was CAD 3.072 billion, a year-over-year increase of about 17%. Net profit was CAD 1.795 billion, a year-over-year increase of 25%. The main reason for the growth in performance was the realization of CAD 163 million in the US commercial banking and wealth management business, a sequential increase of 101% and a year-over-year increase of 163%, which was better than expected; at the same time, the reduction in credit loss provisions exceeded expectations, with credit loss provisions of CAD 483 million in Q3 2024, a decrease of CAD 253 million from the same period last year. CM is the only bank among the Big Five to have reduced its credit loss provisions, demonstrating strong and stable operational capabilities, which also supported a significant surge in revenue.

Toronto-Dominion Bank (TD) had a poor Q3 2024 performance. Operating income was CAD 14.176 billion, a year-over-year increase of about 8%, of which net interest income was CAD 7.579 billion, a year-over-year increase of about 4%, and non-interest income was CAD 6.597 billion, a year-over-year increase of about 15%. This growth was mainly due to higher fee income from market-driven businesses, as well as increased transaction volumes and expanded deposit spreads in the Canadian personal and commercial banking departments. However, the provision for credit losses was CAD 1.072 billion, a year-over-year increase of about 40%. The net profit loss in Q3 2024 was CAD 181 million, mainly due to the negative impact of the anti-money laundering storm, and the company set aside USD 2.6 billion (about CAD 3.458 billion) to deal with US anti-money laundering fines. Due to the loss of profit, the EPS decreased from CAD 1.53 in the same period last year to -CAD 0.14.

Figure：Dividend Yields of the Five Major Banks

Source: Moomoo Research

As is well known, high dividends are one of the important reasons why Canada's five major banks have attracted the attention of investors. In the trend of interest rate cuts, high dividends are very attractive to investors. Specifically:

This quarter, the declared dividend is CAD 1.55 per share, a year-over-year increase of 5%, and the same as the previous quarter. The company's EPS this quarter is CAD 2.48, with a dividend payout ratio of 62.5%, and there is still room for improvement. The annual dividend is CAD 6.2, calculated based on the current share price of CAD 112.71, and the expected future annualized dividend yield is 5.5%. BMO has a quarterly dividend payout cycle, with a high frequency and has increased dividends for several consecutive years, and there is a large growth space for dividends.

This quarter, BNS announced a dividend of CAD 1.06 per share, which is essentially flat year-over-year. The company's EPS for the quarter is CAD 1.06, achieving a 100% dividend payout ratio, demonstrating a strong commitment to shareholder returns. The annual dividend amounts to CAD 4.24, and based on the current share price of CAD 62.27, the projected annualized dividend yield is 6.8%. BNS has a quarterly dividend payout cycle with a high frequency and has consistently increased dividends for several years, ensuring a high level of dividend stability.

This quarter, RY declared a dividend of CAD 1.42 per share, a 5.2% increase year-over-year, and flat quarter-over-quarter. The company's EPS for the quarter is CAD 1.42, achieving a 100% dividend payout ratio, showing a significant focus on shareholder returns. The annual dividend is CAD 5.68, and based on the current share price of CAD 162.98, the anticipated annualized dividend yield is 3.5%, the lowest among the Big Five banks. However, RY's strong fundamentals and leading share price increase compensate for the lower dividend yield. RY's dividend payout cycle is quarterly, with a high frequency and a consistent multi-year increase in dividends, ensuring high dividend stability.

This quarter, CM announced a dividend of CAD 0.9 per share, a 3.4% increase year-over-year, and flat quarter-over-quarter. The company's EPS for the quarter is CAD 1.83, with a dividend payout ratio of only 49.2%, the lowest among the Big Five banks, indicating significant room for future increases. The annual dividend is CAD 3.6, and based on the current share price of CAD 78.86, the expected annualized dividend yield is 4.6%, higher than the yield on Canadian 10-year government bonds at 3.16%. CM's dividend payout cycle is quarterly, with a high frequency and a consistent multi-year increase in dividends, ensuring high dividend stability.

This quarter, TD declared a dividend of CAD 1.02 per share, a 6.25% increase year-over-year, and flat quarter-over-quarter. The company reported a loss in EPS for the quarter, yet it utilized cash reserves to distribute dividends. The annual dividend amounts to CAD 4.08, and based on the current share price of CAD 80.75, the projected annualized dividend yield is 5.01%. TD's dividend payout cycle is quarterly, with a high frequency and a consistent multi-year increase in dividends. Although the current anti-money laundering controversy has significantly impacted EPS, the negative impact is expected to be short-term, and dividend distribution remains stable.

In summary, the annualized dividend yields of the Big Five banks are all higher than the yield on Canadian 10-year government bonds (3.16%), making them attractive in a low-interest-rate environment. All five banks have a quarterly dividend payout cycle with increasing dividend amounts year over year, ensuring very high stability. In terms of dividend payout ratios, RY and BNS place a strong emphasis on shareholder returns, achieving a 100% payout ratio, while CM and BMO have room for improvement. Regarding dividend yields, BNS leads the other four major banks with a 6.8% yield, while RY has the lowest yield at 3.5%, primarily due to its significant share price increase.

Overall, in a high-interest-rate environment, the five major Canadian banks have been negatively affected to varying degrees by the reduction in net interest margins. However, CM and RY have been the least affected, maintaining steady growth in net interest income while also experiencing strong growth in non-interest income and only a slight increase or even a decrease in credit loss provisions. Consequently, both CM and RY have achieved robust growth in net profits, and their share prices have performed very optimistically. In terms of dividend yields, due to significant share price increases and relatively high valuations, CM and RY rank at the bottom in terms of dividend yields, but they still exceed the risk-free rate in Canada, retaining some appeal.

BMO and TD have seen larger increases in credit loss provisions, and TD also faces the impact of the anti-money laundering controversy, leading to uncertainty in future performance and causing market concerns. Currently, the increase in BMO's credit loss provisions will continue to put pressure on future performance, requiring further observation. The anti-money laundering controversy at TD is expected to be resolved by the end of the year, with a limited impact on long-term performance, and it is anticipated that future EPS will turn positive, marking a turning point. BNS has also been negatively impacted by the increase in credit loss provisions and credit costs, leading to a decline in net profits. However, due to better-than-expected market performance, its share price has remained relatively stable. In terms of dividend yields, all three banks have yields above 5%, with BNS leading at 6.8%, which is very attractive, provided that the company's fundamental performance remains stable.

Looking ahead, as the Bank of Canada continues to lower interest rates and the Federal Reserve also opens the door to rate cuts, it is expected that bank net interest margins will continue to narrow. However, the rate cuts are expected to promote a gentle economic recovery, increase market transaction activities, and boost loan business and non-interest income growth, potentially supporting performance. Therefore, in the wave of interest rate cuts, banks with stable fundamentals and high dividend yields will enable investors to reap dual benefits from share price increases and dividends.