Sector Overview – Canadian Banks

This article provides a sector overview of the Canadian banks. The Canadian banks are counted amongst the safest and most stable financial institutions of the world and have a proven track record of being conservative and focusing on long term growth and prosperity. It is no wonder that the banks routinely find themselves in portfolios of most long term focused investors and make for a great core position. The banks are also great for income focused investors as they paid a good starting dividend and also raise those dividends regularly. Now that Canada is facing a lot of headwinds in the economy, most bank stocks have been beaten down and provide a great opportunity to initiate/add to the position.

My previous articles in the Sector Overview garnered plenty of interest as you readers found it valuable. So, without further ado, here’s a sector overview for Canadian banks.

Sector Overview – Canadian Banks

The Canadian banking sector is made up few names that control bulk of the financial sector. The ‘Big Five’, composed of Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO), and Canadian Imperial Bank of Commerce (CM.TO) – are the first tier of the banks taking majority of the market share. The second-tier is composed of smaller regional banks including National Bank of Canada (NA.TO), Canadian Western Bank (CWB.TO) and Laurentian Bank of Canada (LB.TO).

Note that this is by no means an exhaustive list of all banks operating in Canada. A full list of all Canadian banks and credit unions can be found here.

All numbers used are in Canadian dollars (CAD$).

Sector Overview - Cdn Banks

The following charts provide an overview comparing the banks

Cdn Banks - Market Cap

Cdn Banks - Yield

Royal Bank of Canada

Royal Bank of Canada Royal Bank of Canada is the largest financial institution in Canada and has operations in 52 countries including a strong presence in the Caribbean. Royal Bank of Canada was founded in 1864 and has paid dividends since 1870.

Royal Bank has been looking into expanding its operations in the US and recently made its largest acquisitions by acquiring City National Corp for $5.4B, giving it access to wealthy clients in Southern California. Royal Bank has always relied on its wealth management business heavily and a lot of high net-worth individuals count Royal Bank as their go-to provider.

Read the Dividend Stock Analysis for Royal Bank of Canada.

Toronto-Dominion Bank

TD Bank Toronto-Dominion Bank is the second largest of the Canadian banks and was founded in 1855 and has paid dividends since 1857.

Toronto-Dominion Bank has a big exposure to the US commercial banking market. The bulk of the operations still exist in Canada, but the bank has been expanding aggressively in the US since the financial crisis. In addition, the bank has been acquiring and growing its credit-card/lending business to find more growth.

Read the Dividend Stock Analysis for Toronto-Dominion Bank.

Bank of Nova Scotia

BNS-large Bank of Nova Scotia is the third largest and the most international of the Canadian banks. Founded in 1832 (and paid dividends every year since then), the bank has operations in 55 countries. The bank boasts second longest streak of dividends paid in Canadian corporate history.

Bank of Nova Scotia has a big exposure to the Latin American market, which has seen some write-downs in the recent past. The bank had to cut some operations in South American countries, but has been buying up assets in fast growing Latin American markets such as Mexico.

Read the Dividend Stock Analysis for Bank of Nova Scotia.

Bank of Montreal

BMO Bank of Montreal is the oldest of the Canadian banks – founded in 1817. The bank has also the track record of being the first company to start paying dividends in Canadian corporate history in 1829 – an unbroken chain of dividends that are still continued to this day.

As other banks, Bank of Montreal has majority of its operations in Canada, but as a percentage – BMO has the highest exposure to the US market, being a prominent player in the capital markets.

Read the Dividend Stock Analysis for Bank of Montreal.

Canadian Imperial Bank of Commerce

CIBC Canadian Imperial Bank of Commerce is the smallest of the first-tier ‘Big Five’ Canadian banks. The bank was founded in 1867 and has paid dividends since 1868.

CIBC is also the least diversified amongst the Big Five – with most of its operations in Canada, with its second largest exposure in the Caribbean.

Read the Dividend Stock Analysis for Canadian Imperial Bank of Commerce.

National Bank of Canada

NA National Bank of Canada is the sixth largest bank in Canada has some writers like to include it in the top-tier calling them the ‘Big Six’ instead of the ‘Big Five’. The bank was founded in 1859.

National Bank has been a regional player with most of its operations in Quebec, New Brunswick and Ontario, but has started expanding out of the eastern provinces recently. The bank has a strong balance sheet and was ranked #3 in Bloomberg’s World’s Safest Banks index in 2011.

Canadian Western Bank

CWB Canadian Western Bank was founded in 1982 and is a regional bank in western Canada, with a focus in Alberta.

Although the bank does not boast the history compared to the other banks, the bank has grown over the course of three decades via mergers and acquisitions and riding the oil boom in Alberta. Now that the commodities market and the oil sector has crashed, the bank has come under immense pressure in the marketplace, but overall – analyst are confident that the bank will weather this downturn easily.

Laurentian Bank of Canada

LB Laurentian Bank of Canada is the smallest of the Canadian banks in this list. The bank has existed as an institution since 1846 and has remained focused on the Quebec market.

The bank had expanded operations into Ontario and western Canada, but sold most of its operations: in 2001, it sold its two Saskatchewan branches to Canadian Western Bank; and in 2003 sold its 57 retail branches with a $2 billion loan portfolio and $1.9 billion in deposits to Toronto-Dominion Bank. The bank now maintains all of its focus on the Quebec market.

Summary

The Canadian banking sector is made up a handful of banks which control the bulk of the financial sector in the country. The Canadian banks are listed as some of the safest financial institutions of the world – almost all rankings have atleast two banks in the top-10 every year. The companies have a long track record of being conservative and focused on long-term stability and prosperity, some having existed and paying unbroken chain of dividends for a better part of 150-200 years. It is not surprising to find the banks make part of almost all Canadian investors forming a great core portfolio position.

What are your thoughts on the Canadian banking sector. Do you own these banks in your portfolio? Share your thoughts below and also what sector overview would you like to see profiled next?

Full Disclosure: Long BNS, TD. My full list of holdings is available here.

22 thoughts on “Sector Overview – Canadian Banks

    • Hi Dan,
      My pick is a toss up between TD and BNS – two of my holdings 🙂
      They serve slightly different risk-reward profiles. TD is more focused on US and Canada markets – US market is a great growth opportunity for TD and they are doing really well there. BNS is a bit more riskier with more exposure to emerging markets, but the potential for reward is also higher there.

      R2R

      • TD and BNS really seem to compliment each other in that regard. Purchasing both, as you did, R2R, is a good idea in order to strike a balance between risk and reward.

        Sincerely,
        ARB–Angry Retail Banker

        • They do complement each other quite well…while still having most of its exposure to the Canadian market. However, TD has focused on growing its US market exposure over the years and launched a new-found vigor after the financial crisis. The timing couldnt have been better.

          Best
          R2R

  1. Nice overview of the large Canadian banks and others. Of course, there’s no need to convince me about owning any of these banks. Their histories, conservative business practices and semi-monopoly status as all Canadian banks must have a charter before opening for business ensures that they’ll be able to weather the current Canadian economic headwinds just fine. Long TD, BNS and RY. Great current yields and value too these days!

    • Glad you liked the article, DivHut. The Canadian bank business truly is something wonderful and something I can easily board the train on. Good picks there, DivHut…I have been looking at RY and like it more and more – I think it provides a really good risk-reward profile, a very healthy dividend to start with and of course, the div growth. Might be the next bank if I decide to add another bank to my portfolio.

      cheers
      R2R

  2. Thanks for taking the time to write this up R2R. Thank you my friend. Awesome companies and I know we would all love to own them. So many quality companies but so limited capital as always 🙂 My favorites are TD / BNS / RY in that order. Thanks R2R. Take care my friend and keep hustling it up! Cheers.

    • I hear you, DH. I would love to own the other Cdn banks that I dont own — they are all great companies that are going to do well for investors over years to come. Thanks for sharing your preferences.

      cheers
      R2R

  3. the PE are at 10, the future PE is less than the current signifies growth. Even with the interest decrease these banks will make money. I’m buying these for higher yield to offset my lower yield growth stocks.

    • Yup…the banks are beaten down quite a bit and the difference between PE and Forward PE indicate that. Looking at the analyst EPS growth rates for 1-yr and 5-yr (even though the 5-yr growth rates are hard to predict), the banks are going to keep growing their assets and earnings — so its business as usual and definitely a good time to load up.

      Best wishes
      R2R

  4. Somehow I’ve managed to not own any of the Canadian banks. I have to rectify that soon, but I have other companies ahead of them in my buy list. Great companies with the most amazing dividend streaks I’ve ever seen.

    Great write-up. You should do a follow up on the banking sector as a whole, specifically on how to analyze and value bank stocks. There is a difference in analyzing their debt when compared to other sectors due to their reliance on debt for revenue and capital requirements to satisfy the needs of deposit customers.

    Sincerely,
    ARB–Angry Retail Banker

    • You do need to correct that and start adding Cdn banks to your portfolio 🙂 Those dividend streaks are phenomenal and hard to match.

      Thanks for the suggestion – I will keep that in mind and cover it in a future article on evaluating banks and profile the financial sector as a whole.

      Best wishes
      R2R

    • Interesting to hear that you are long all except CWB. I am really impressed with CM and NA – the more I read about it – I think they have some great assets and the balance sheets look great. Being a smaller player – probably has more room to grow as well.

      R2R

  5. In terms on growth, I love the National Bank! But last time I checked, RY was to me the best buy these days for its (then) undervalued price and its ability to generate higher growth from capital markets. TD was the “second” choice so to speak as I also like this bank a lot!

    Cheers,

    Mike

    • Thanks for sharing your thoughts, Mike. RY does seem to present a very nice risk-reward profile. I like that they have a great high net worth individual customer base and they sure are going after them with teh City National acquisition. I will need to take a closer look at NA as well.

      cheers
      R2R

  6. Bob Loblaw says:

    Why do you think the banks are getting beat down so much? What catalyst will turn things around?

    Certainly their collective exposure to oil is one drawback.

    • Hi Bob,
      There are a lot of issues facing Canada – including a crash in commodities market, ongoing recession, housing market bubble, fall of the Cdn $ etc. I did a series of analysis on the top-5 banks and have captured the details in those articles – check it this one on TD in the section ‘Outlook and Risks’: http://seekingalpha.com/article/3496636-toronto-dominion-bank-dividend-stock-analysis-2015

      The challenges have meant that the banks are taking a beating – as is usually the case whenever a country faces recession or bubbles, the banks face headwinds. But they are also punished more than needed, and I think its a good time to buy for long term investment.

      Hope that helps
      R2R

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