2 Blue Chip Bank Stocks Canadians Can Buy and Hold Forever
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Banks and financial institutions are essential to the economy. Although the business they run may seem complicated, the basic idea or business model is easy to understand. Over the past few months, Canadian bank stocks have lost momentum due to a variety of factors, including rising interest rates, rising inflation, geopolitical tensions, and more.
While a slight rise in interest rates may reduce a bank’s lending activity, it should be offset by higher profit margins. Let’s take a look at two top bank stocks that investors can buy now and enjoy compounding gains over time.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY)(NYSE:RY) is the largest company on the TSX and is valued at $186 billion by market capitalization. Over the past 10 years, RY stock has returned 236% to investors after adjusting for dividends.
In the first quarter of fiscal 2022 (ended January), Royal Bank of Canada reported earnings of $4.1 billion, a 6% year-over-year increase. It was the bank’s second-highest profit ever, with pre-tax profit also up 10% on strong customer-focused volume growth as well as record investment banking revenues and an outstanding performance from the wealth management division.
Royal Bank of Canada reported a return on equity of 17.3%, which, combined with a strong capital ratio, allowed the company to effectively deploy its capital. In the first quarter, it paid out $1.7 billion to investors through dividends and $1.3 billion through share buybacks. RY stock is down 11.5% from all-time highs, but offers investors a tasty dividend yield of 3.75%.
The company ended the first quarter with a CET1 ratio of 13.5%, indicating that it has $13 billion in excess capital, given that banks must maintain an 11% ratio. A higher CET1 ratio provides Royal Bank of Canada with the flexibility to invest in technology and accelerate the deployment of organic growth opportunities.
National bank of Canada
One of the largest banks in the country, National bank of Canada (TSX:NA) is valued at $30 billion by market cap. Over the past 10 years, NA stocks have returned more than 250% to investors, after accounting for dividend payouts. Currently, it is trading 13% below all-time highs, making it attractive to value and income investors.
In the first quarter of fiscal 2022, National Bank reported net income of $932 million, or $2.65 per share, compared to net income of $761 million, or $2.15 per share, at the same time last year. The growth in net income was attributed to exceptional revenue measures and the reversal of provisions for credit losses on non-credit impaired loans made during the ongoing pandemic.
National Bank’s earnings before provisions for credit losses were $1.18 billion compared to $1.04 billion in the first quarter of fiscal 2021.
National Bank is expected to report adjusted earnings per share of $9.53 in fiscal 2022, indicating a forward price-earnings multiple of 9.5, which is quite reasonable given that the company is expected to grow its earnings at an annual rate of 9.1% over the next five years. Moreover, it also offers investors a dividend yield of 3.9%.
An investment of $20,000 in each of the two stocks will allow you to generate more than $1,500 in annual dividends.