Business and Financial Education: A Canadian Perspective.
Saturday, February 26, 2011
Canadian Banks Generating Huge Profits: CIBC and National Bank Lead the Way.
Earnings season for the Canadian banks were off to a great start on Thursday when CIBC (TSE:CM) reported a $799 million profit. This was more than what industry experts were expecting and could bode very well for investors in Canada's other major banks as well.
Last year, the bank reported earnings of $652 million during the same three month period. This growth is an indication of an improved lending environment in Canada, as well as an improved environment for investment fund managers, of which CIBC Mutual Funds is a large player. When stock markets increase in value, the amount of money that CIBC charges its clients to manage money (usually around 2-2.5%) goes up as well.
CIBC said it would maintain an 87 cent per share dividend, but investors were hoping that they would boost it, giving the other banks motivation to do the same. Currently CIBC is only paying out about 45 percent of its earnings to shareholders, which is a very reasonable number and a number that could be increased in the future. For the intelligent investor, the ability for CIBC to raise its dividend in the future is a sign of financial health and a good catalyst for a rise in the share price in the future.
In addition, the company has more than enough capital on hand to make acquisitions or initiate share buybacks. Share buybacks are great for shareholders as they increase earnings per share by reducing the number of shares, which increases your share of the business pie.
National Bank (TSE: NA) also reported a record profit of $312 million. Last year, quarterly profits came in at $215 million. This massive increase will surely bode well for shareholders when the company reviews its dividends and perhaps decides to increase the amount of money that they want to pay out to shareholders.
Both National Bank and CIBC have provided an excellent window into the health of the Canadian financial landscape. As a Canadian investor, it is important to ensure that one of Canada's financial conglomerates, whether it be CIBC, National Bank, Royal Bank (TSE:RY), Scotiabank (TSE:BNS), TD (TSE:TD), or the Bank of Montreal (TSE:BMO), make up a portion of your investment portfolio. The balance sheets are healthy, business is booming, and dividend increases are sure to start coming down the road. Just be careful not to get too greedy and overpay for them on a day when other investors have bid up the share prices. Wait for a down day and gradually buy your way in.