Written by Christopher Liew, CFA at The Motley Fool Canada
Should investors avoid Canadian bank stocks following the recent collapse of three American banks and one Swiss bank? After the Home Bank of Canada failed in 1923, no major banking collapse has happened in Canada. The government swiftly enacted strict federal policies and protection measures.
Industry experts believe that while Canadian banks face a serious challenge today, the banking sector is stable, profitable, and highly regulated. Investors have nothing to fear, especially with dividend pioneer the Bank of Montreal (TSX:BMO). Another safe bank is Canadian Western Bank (TSX:CWB), which is not a Big Six bank but the bank carries a dividend aristocrat status.
A winner in any environment
BMO is North America’s eighth-largest bank and Canada’s fourth-largest by asset size. On February 1, 2023, the $83.6 billion bank completed the acquisition of Bank of the West in the United States. The US$16.3 billion transaction means a more significant footprint on American soil.
In Q1 fiscal 2023, BMO’s net income fell to $247 million from $2.9 billion, mainly due to the valuation adjustments on the acquisition. The provision for credit losses (PCLs) increased by 119% year over year to $217 million. Its CEO, Darryl White commented that, “While the macroeconomic environment remains uncertain, we’re well-situated to win in any environment.”
BMO is well-loved by income investors for its lengthy dividend track record. The oldest Canadian bank started paying dividends in 1829, and the practice continues. If you invest today, the share price is $118.83 (-2.1% year to date), while the dividend yield is 4.64%.
Besides gaining about 1.8 million customers, BMO adds over 500 branches, and commercial and wealth offices in key U.S. growth markets. The deal also strengthens BMO’s position in three of the top five U.S. markets and its presence in 32 states. Expect its national specialty commercial businesses and digital banking platform to expand.
The Bank of the West is one of the largest banks in Denver, Colorado and rebranding of the 68 branches has begun. Ernie Johannson, BMO’s group head of North American Personal & Business Banking, said, “BMO didn’t have a retail banking presence in Colorado, but we did provide commercial banking services. Those will continue.”
While the upside from the transaction is still unknown, it gives BMO a competitive advantage, and the bank should deliver resilient and robust earnings growth and long-term value for shareholders.
More than a regional bank
CWB is a regional bank like the distressed Silicon Valley Bank, but to assume it could suffer the same fate is unfounded. While it has a higher risk profile than the Big Six, no Canadian bank can match 31 consecutive years of dividend increases. The most recent dividend hike was 7%.
At $23.99 per share (+0.94%), the dividend yield is 5.44%. If you worry about the sustainability of dividend payments, the payout ratio is 36.5%. CWB’s deep relationships with its clients, mostly business owners, help drive growth.
In Q4 2022, the average loan growth in its coverage area versus Q4 2021 was 9%. CWB President and CEO, Chris Fowler, said, “Our teams delivered strategically targeted loan growth this quarter, with very strong increases in Ontario (24% of total loans).”
Secure and stable
Canadian banks aren’t immune to market volatility but should endure an emerging crisis. The country’s banking system is far more secure and a bedrock of stability.
Before you consider Bank of Montreal, 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 March 2023... and Bank of Montreal 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 22 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks * Returns as of 3/7/23
Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Western Bank. The Motley Fool has a disclosure policy.