Canadian Banks – Steady Sails in Shifting Winds

Canadian Banks – Steady Sails in Shifting Winds

January 16, 2025

Funds in focus: Brompton Split Banc Corp. (SBC), Life & Banc Split Corp. (LBS), Brompton North American Financials Dividend ETF (BFIN)

The Canadian banks demonstrated remarkable strength in 2024, with the Big 6 gaining 25.3%, outpacing the S&P/TSX Composite Index by 3.7 percentage points.¹ This strong performance came despite multiple headwinds facing the industry last year, including slowing economic growth, muted consumer spending, and rising unemployment. We think Canadian banks will still be able to perform well this year driven by an improvement in the economic environment, steepening yield curve, stabilization of credit quality, and a friendlier regulatory environment. The economic implications of US tariff threats and an election year in Canada are sources of uncertainties that we will closely monitor.

Improving Growth and Steeper Yield Curve Benefit Banks

We believe that the economic environment will become more favorable for Canadian banks in 2025. Canada’s GDP growth is forecasted to improve this year with economists projecting 2% GDP growth in Canada compared to a 1% gain in 2024.² In terms of monetary policy, the Bank of Canada is projected to continue lowering interest rates throughout the year. Currently, the market is pricing in 2 to 3 additional rate cuts in 2025 with the overnight rate settling between 2.50% and 2.75% by year end.³ At the same time, long rates are expected to stay roughly unchanged this year, leading to a steeper yield curve. Banks can borrow at lower short-term rates, easing funding cost pressure, and lend at higher long-term rates, potentially increasing net interest margin.

Lower Credit Losses and Higher Loan Growth Expected for Canadian Banks

As interest rates decline and economic conditions improve throughout 2025, we believe that the credit environment should stabilize, potentially leading to a peak in provision for credit losses (PCLs) during the year, as shown in the chart below. As the market starts to gain confidence that credit losses are peaking, this should have a positive impact on bank stock performance.

Credit Loss Provisions Expected to Decline for Big 6 Canadian Banks

Source: Bloomberg, as of December 31, 2024. Big 6 Canadian banks = Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank.

We believe that lending volume will pick up in 2025, particularly in residential mortgages. The housing market recovery, coupled with lower interest rates, is likely to drive increased demand for mortgages. TD is forecasting a 16% rise in home sales in 2025 on a year over year basis.⁴ Recent changes to mortgage rules that came into effect on December 12, 2024, such as expanding eligibility for 30-year mortgage amortizations for all first-time homebuyers and for all buyers of new builds and raising the price cap for insured mortgages from $1 million to $1.5 million, should further stimulate mortgage lending.⁵

Positive Regulatory Environment

On the regulatory front, the capital rules for Canadian banks seem to have reached their peak, and there’s growing expectation that the Office of the Superintendent of Financial Institutions (OSFI) may need to adjust its stance in response to developments in the United States. As the US considers softening the final stages of the B3E (Basel III Endgame) rules, we expect OSFI to follow suit directionally in order to maintain competitiveness in the market. This potential easing of capital requirements could provide Canadian banks with more flexibility in their operations and lending capacity.

Brompton’s Approach

Split Corp. Class A shares provide investors an opportunity to generate enhanced returns on a portfolio of stocks compared to a direct investment in those stocks. Brompton Split Banc Corp. (SBC) and Life & Banc Split Corp. (LBS) invest in Canada’s six largest banks, offering enhanced capital appreciation potential and monthly cash distributions.

Brompton North American Financials Dividend ETF (BFIN) provides monthly distributions and the opportunity for capital appreciation through an investment in an actively managed, diversified portfolio of large cap North American financial services companies. BFIN’s portfolio comprises of North American Financial Services companies with a market capitalization of at least $5 billion at the time of investment. The strategy includes an active covered call writing program to earn option premiums and lower the overall volatility of portfolio returns.

¹Source: Bloomberg, as of December 31, 2024.
²Source: Bank of Canada. October 23, 2024. Monetary Policy Report—October 2024—Canadian economy.
³Source: Bloomberg, as of January 3, 2025.
⁴Source: TD Economics, December 2024. https://economics.td.com/ca-forecast-tables#home-sales.
⁵Source: Department of Finance Canada. September 16, 2024.
⁶Returns are for the periods ended December 31, 2024, and are unaudited. The tables show the compound return on the Class A shares Brompton Split Banc Corp. and Life & Banc Split Corp. and the CAD and USD units of Brompton North American Financials Dividend ETF, for each period indicated. Past performance does not necessarily indicate how the funds will perform in the future. The performance information shown is based on the net asset value per Class A Share or NAV per unit, as applicable, and assumes that distributions made by the funds on their Class A Shares or units during the periods shown were reinvested at net asset value per Class A Share or net asset value per unit in additional Class A Shares or units of the respective fund. Past performance does not necessarily indicate how the funds will perform in the future.
⁷An estimate of the annual yield an investor would receive if the most recent monthly distribution remained unchanged for the next 12 months, stated as a percentage of the closing market price of the Class A Shares or units on December 31, 2024. Source: LSEG Eikon.
This document is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. The opinions contained in this report are solely those of Brompton Funds Limited (“BFL”) and are subject to change without notice. BFL makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, BFL assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. BFL is under no obligation to update the information contained herein. The information should not be regarded as a substitute for the exercise of your own judgment. Please read the prospectus or annual information form before investing.
Commissions, trailing commissions, management fees and expenses all may be associated with exchange-traded fund investments. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income tax payable by any securityholder that would have reduced returns. Please read the prospectus before investing. Exchange-traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
You will usually pay brokerage fees to your dealer if you purchase or sell shares of SBC or LBS on the Toronto Stock Exchange or other alternative Canadian trading system (an “exchange”). If the shares are purchased or sold on an exchange, investors may pay more than the current net asset value when buying shares of the investment fund and may receive less than the current net asset value when selling them.
There are ongoing fees and expenses with owning shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about SBC and LBS in the public filings available at www.sedarplus.ca. The indicated rates of return are the historical annual compounded total returns including changes in share value and reinvestment of all distributions and do not take into account certain fees such as redemption costs or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.
Information contained in this document was published at a specific point in time. Upon publication, it is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times.
Certain statements contained in this document constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to matters disclosed in this document and to other matters identified in public filings relating to the funds, to the future outlook of the funds and anticipated events or results and may include statements regarding the future financial performance of the funds. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Investors should not place undue reliance on forward-looking statements. These forward looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

Maggie Meng

Senior Investment Analyst

Ms. Meng  specializes in equity security selection with a focus on global utilities, real estate, industrials and telecommunications. Ms. Meng is a CFA Charterholder and is a member of the Toronto CFA Society. Ms. Meng is also a Chartered Professional Accountant, Certified General Accountant and is a member of the Chartered Professional Accountants of Ontario.

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