Despite some market volatility in early September, the Toronto Stock Exchange (TSX) managed to deliver slight gains, outperforming the S&P 500. This strength has been largely driven by the Canadian banking sector, with the Big Six banks attracting significant investor attention. These bank stocks offer a compelling mix of capital appreciation, reliable dividend income, and sustainable dividend growth potential.
Among the Big Six, TD Bank (TSX:TD) and National Bank of Canada (TSX:NA) stand out for their strong growth prospects, according to analysts.
As Canada’s second-largest bank, TD has long been regarded as one of the smartest investment choices in the sector. It offers investors an attractive quarterly dividend yielding 4.09%, with a consistent history of annual dividend increases, making it an ideal “buy-and-hold” candidate.
Although the bank recently faced pressure related to anti-money laundering (AML) issues, its latest quarterly earnings exceeded expectations. Year-to-date, TD’s stock has surged over 30%, and it has gained more than 60% over the past five years. With a trailing price-to-earnings (P/E) ratio of just 8.8x, the stock appears undervalued. Analysts believe the market overreacted to the AML concerns, noting that the current stock price already reflects these risks, positioning TD for future growth.
National Bank delivered solid performance in the first half of fiscal 2025, with adjusted net income rising 21% year-over-year. The bank ended its fiscal second quarter with a Common Equity Tier 1 (CET1) ratio of 13.7%, significantly exceeding regulatory requirements. This indicates ample excess capital to weather potential headwinds or pursue strategic acquisitions.
In early February, the bank successfully completed its acquisition of Canadian Western Bank (CWB), providing Quebec-based National Bank with a strong platform in Western Canada to drive its domestic growth strategy. Along with its Q2 fiscal 2025 results, the bank announced a 3.4% dividend increase, offering a current dividend yield of 3.2%.
As the smallest but fastest-growing bank among the Big Six, National Bank’s stock has delivered nearly 100% returns over the past five years. Despite a recent pullback of around 5% and a higher trailing P/E ratio of 14.3x compared to some peers, its strong earnings performance and strategic initiatives make it an attractive investment. Analysts expect it to be a top-three performer in the banking sector over the next five years.
