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Canadian chartered banks have delivered index-beating returns over the last five years, even before taking their generous dividends into account.
For the five years to Sept. 26, the S&P/TSX Financials Index has returned 115.2%, well ahead of 81.1% for the S&P/TSX 60. The only sectors that came close to matching or exceeding this were energy, up 165.5%, and materials, up 96.7%. But those results reflect recovery from the very depressed prices of commodities due to the outbreak of Covid 19 in early 2020.
The five-year period includes a complete interest rate cycle, with the Bank of Canada and the U.S. Federal Reserve raising short-term rates from 0.25%-0.5% in 2021 to 5% and 5.5% respectively by the end of 2022.
They began to reduce rates in mid-2024, and that trend is now picking up steam. Short-term interest rates were cut by another 25 basis points at the end of October, to 2.25% in Canada and to 3.75%-4.00% in the U.S. President Trump has made it clear his administration favours much lower interest rates, while Canada’s economy faces headwinds from tariffs and a reduced level of immigration. In these circumstances, investors can expect further drops in interest rates, which have traditionally been regarded as bullish for banks and financial stocks generally.
This is due to several factors. One of the most important for bank earnings is the fact that banks reduce the interest rates they pay depositors much more rapidly than those they charge borrowers. This has the effect of widening the banks’ net interest margin (NIM), their largest single source of earnings. Lower rates also have the effect of easing the interest burden on indebted borrowers, whether commercial or individual, thus reducing the likelihood of defaulting.
The banks’ provision for credit losses (PCLs), which is adjusted each quarter based on models of likely distress, have been flattening out after rising sharply when President Trump initially announced his tariffs in the second quarter. Lastly, falling interest rates encourage economic growth by making it cheaper for clients to borrow to fund extra spending, whether on capital investment or personal consumption.
The iShares S&P/TSX Capped Financials ETF (TSX: XFN), with $1.8 billion in assets under management (AUM), has just under 65% of its assets in the chartered banks, with remainder consisting of insurance companies and Brookfield Corp., the diversified asset manager.
The life insurers such as Manulife and Sun Life, and Property and Casualty insurers, like Intact also benefit from lower interest rates. This is because their relatively high dividends become more attractive and lower interest rates are beneficial for equity and bond markets in which their policy premiums are invested, as is the case for Brookfield, although lower long-term rates do increase the value of their liabilities.
So how have Canadian banks been doing? The smallest of the Big Six, National Bank (TSX: NA) had been the best performer, up 125% over the last five years, before falling behind over the last year (up only 17.6%) due to issuing equity to acquire Canadian Western Bank in a deal which closed early this year.
It has been surpassed by Bank of Montreal (TSX: BMO) up 135% over the same period, and 49% in the last year. It carried out its own major acquisition of U.S.-based Bank of the West in 2023 and has had time to demonstrate the benefits of the deal.
While formerly out of favour, Canadian Imperial Bank of Commerce (TSX: CM) has almost caught National, up 125% in five years and 34% in the last year. It’s derisking by reducing its investment bank exposure and increasing its asset management.
The largest Canadian bank, Royal Bank of Canada (TSX: RY) managed a 116% five-year gain (21% in the last year) after taking over HSBC’s Canadian operations and adding 2% to its 21% market share of the Canadian banking market.
Former market favourite Toronto-Dominion Bank (TSX: TD) stumbled badly when inadequate anti-money laundering controls in the U.S. resulted in a US$3 billion fine and, more importantly, a cap on its U.S. retail assets. That had the effect of removing its growth strategy of buying U.S. regional banks to expand its network. New management under CEO Raymond Chun, former head of the insurance business, and a revamped board of directors has focused on cutting bureaucracy and costs while strengthening controls. The stock has rebounded 29% in the last year but is only up 76% over five years.
Lastly, there is Bank of Nova Scotia (TSX: BNS). It’s the most internationally exposed of the Canadian banks, with over 35% of its assets in the Pacific Rim countries of Mexico, Peru, and Chile. It has been a disappointing performer as investors have been unwilling to value these operations at the same multiple as North American businesses, due to higher volatility and political risk.
Relatively new CEO is Scott Thomson, a Scotiabank director but a non-bank appointment and former CEO of heavy equipment distributor Finning, which has extensive exposure in Latin America. He has refocused the bank on North America, selling the sub-scale Colombian operations and buying a 14.9% stake in Cleveland based Keycorp.
Scotiabank has been the worst performer amongst the major banks, only up 60% in the last five years. Having peaked at $75 in early 2022, the stock subsequently bottomed out at $56 in late 2023 after the sharp rise in interest rates and the emerging problems in its Latin American operations hurt sentiment.
However, Scott Thomson’s refocusing of the bank on North American operations has seen the share price climb to an all-time high at $91.40.
For the third quarter, adjusted net income was up 15%, to $2.52 billion, and diluted earnings per share were up 15%, to $1.88 per share. Return on equity rose to 12.4% from 11.3% a year ago. While Canadian banking earnings were flat at $959 million due increased provision for credit losses, international banking earnings were up 7% at $716 million, driven by strong revenue growth and strong expense management. Global wealth management earnings rose 13% to $427 million. Assets under management were up 12%, to $407 billion, and global banking and markets were up 29%, to $473 million, on very strong capital markets performance.
For the nine months to Aug. 31, Scotiabank’s net income was down 9%, to $5.55 billion, due to the writeoff on the sale of the Colombian operations, although the dividends from its 14.9% stake in KeyCorp are now contributing to income.
Having kept dividends unchanged for several years as it worked through its operational issues, Scotiabank has recently raised its quarterly dividend by $0.04 (3.8%), to $1.10, equivalent to a 4.8% yield.
As the highest yielding of the Big Six banks, and with the strategic focus on growing North American business, which evidently investors regard more favourably than the previous concentration on Latin America, Scotiabank would be of interest to growth investors looking for a Canadian bank turnaround story.
Before making any investment, consult with your financial advisor to ensure that it aligns with your risk-tolerance level and financial objectives.
Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management. He is currently Chief Investment Officer of Calgary-based Spire Wealth Management.
Notes and Disclaimer
Content copyright © 2025 by Gavin Graham. This is an edited version of an article that first appeared in The Internet Wealth Builder newsletter. Used with permission.
The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/Bob Lord
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