Canada Banks Top U.S., Europe Lenders on Higher Yields

Canadian banks reinforced their appeal to investors seeking higher yields amid persistent low interest rates as three of the country’s largest lenders raised quarterly dividends.

Canada’s six biggest banks boast 12-month dividend yields of 3.5 percent to 4.2 percent, higher than any U.S. bank with a market value of at least $10 billion and more than many European lenders of similar size, according to data compiled by Bloomberg.

Canadian lenders have been ranked the soundest for six straight years by the World Economic Forum and are among the world’s most capitalized. They have increased profits as some global banks including JPMorgan Chase & Co. have seen earnings in most businesses slump.

“This is very attractive for investors,” John Aiken, an analyst with Barclays Plc, said in a phone interview from Toronto. “When you’re looking at a very low interest rate environment, the relative safety and stability of the Canadian banks with roughly a 4 percent dividend yield becomes very attractive, with the potential for capital appreciation if they continue to grow their earnings.”

Canada’s six big banks just finished reporting results for the quarter ended April 30, with earnings surpassing analysts’ expectations even as a slowdown in domestic consumer lending cools profit growth. Canadian Imperial Bank of Commerce, Bank of Montreal and National Bank of Canada each raised their dividends from 2 percent to 4.3 percent.

‘Going Up’

“The dividend yield is one of the reason why they’re attractive,” said John Kinsey, a fund manager at Caldwell Securities Ltd. in Toronto, who helps manage about C$1 billion ($922 million) including bank stocks. “The earnings are no longer really in the double digits -- they’ve come down -- but the dividends keep going up.”

National Bank, based in Montreal, has the highest yield, at about 4.2 percent, and is sixth among North American and Western European banks valued at least $10 billion, according to the data. Bank of Montreal, Canada’s fourth-largest lender by assets, is next at about 4.1 percent, followed by Canadian Imperial, the fifth-biggest, at about 4 percent.

The strong yields from Canadian banks, which seek to return 40 percent to 50 percent of their earnings in dividends to shareholders, are a leftover from the 2008 financial crisis, Aiken said. Canadian banks posted a fraction of the writedowns and charges that U.S. peers took on investments in risky subprime mortgages and debt securities during that time.

Pricey Stocks

“None of the Canadian banks cut their dividend during the financial crisis and the strength of their payout ratios is a carry-over impact from their strong performance,” Aiken said.

Spain’s Banco Santander SA has the highest dividend yield among the group at about 6.3 percent, followed by Stockholm-based Swedbank AB and London-based HSBC Holdings Plc. Sweden’s Skandinaviska Enskilda Banken AB and Germany’s Deutsche Postbank AG round out the top five, the data show. The highest U.S. banks are JPMorgan, ranked 19th with a dividend yield of about 2.9 percent, and San Francisco-based Wells Fargo & Co., in 21st spot with about 2.8 percent.

Still, Canadian bank yields come at a cost for investors: the stocks are more expensive than most U.S. and European peers when measured on a price to tangible book value per share. The promise of greater growth from lenders elsewhere make the Canadian banks less appealing, said David Tuttle, a vice president and research analyst at Franklin Templeton Investments in Toronto.

“Dividends are a very important part of the puzzle for us but ultimately what we’re looking for at Templeton is to buy a stock that offers us a double over a five-year period including dividends,” said Tuttle, whose group manages C$143 billion in assets. “It’s our view that there are more favorable bank stocks outside of Canada to buy.”

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