Many people know that financials make up about 30% of the S&P/TSX. Many also know that Canada’s banking system was rated the safest, most stable banking system in the world during the past financial crisis (and, in fact, is still considered so).
But if you’re not Canadian and not familiar with the market, but you want to invest in this sector, which bank should you buy?
You could always invest in the broader Canadian financial market through the iShares Financials ETF (XFN), and you wouldn’t do badly, there, either. But if you want higher dividends and a chance at the stock splits, you’ll need to buy the banks themselves.
Let’s just assume you’re not going to buy all the banks – that you only have room for one in your portfolio right now. I’ll share a few points with you that might help you make that decision.
Canada’s Conservative Banking System
A few general points you should know about Canada’s banks: they tend to trade together. In other words, news on one tends to act as a bellwether for the others. They’re also very conservative in lending and cautious in their expansions and acquisitions.
The supervisory and regulatory regime in Canada has always been stricter than in other places and this clearly helped the Big 5 sail through the global credit crisis. There simply wasn’t the subprime exposure that there was in the U.S. due to more conservative lending policies. This does not mean there has been no subprime lending in Canada, but obviously it never became the problem it did south of the border.
To this day, the Canadian banking system is still the lowest leveraged one in the world and has well above the required amounts for capital reserves (currently at an average of about 11.6-12%). It has been said that the Big 5 have so much excess cash they don’t know what to do with it. In good years, all five banks tend to increase their dividends about twice a year, making them veritable cash cows.
Canadian bankers are highly sought after, but very loyal to their local banks and prefer to stay here in their own country. A few have left, and been very successful and widely respected around the world, such as Michael Barrett, former chair and CEO of BMO as well as Barclay’s UK. Canada’s banks are also integrated for retail, commercial and investment banking, and they excel at all three.
Although they are thus often treated as a group, there are slight differences that cause some to prefer one bank over the others.
Differences Between Canada’s Big Banks
The main points on which the Big 5 are usually compared are: degree of U.S. exposure; degree of international exposure; and risk-reward factors in their growth profiles.
Canadian Imperial Bank of Commerce
CIBC (TSX: CM) has been described as the bank with the most aggressive risk-taking profiles. Correlated with this perhaps, it also pays out the largest dividend. CIBC is not usually analysts’ top pick among the Big 5. By no means does this make it a bad investment, however.
Bank of Nova Scotia
Also known as Scotiabank (TSX: BNS), BNS is often a favourite due to their conservative reputation but high growth profile in international locations such as the Caribbean and Asia (especially China).
Bank of Montreal
“BEE-Mo,” (TSX: BMO) as it is affectionately called, has been disappointing many over the past year or so with lower than expected returns. Additionally, the performance of Harris Bank, their subsidiary in the Chicago area, has been mediocre (albeit solid and consistent). That said, Harris has probably still been the better performer of the U.S. assets of all Canadian banks.
TD Bank Financial Group
TD Bank (TSX: TD) is top-notch, with stellar growth, management and a fairly conservative reputation. It frequently ranks as the #1 or #2 bank pick among analysts. Like BMO, it has significant U.S exposure through TD Ameritrade and TD Banknorth in the Northeastern United States. So far, performance has been weaker, but not debilatory, with these institutions. Their capital position is still strong.
RBC Financial Group
Like TD and BMO, RBC (TSX: RY) owns U.S. assets through RBC Bank USA and RBC Centura in the mid-Atlantic region and the southeast. It is Canada’s largest bank and now also ranks in one of the top ten most stable banks in the world. It is probably most frequently chosen as analysts’ top pick for the Canadian banking sector.
At a consumer level, I personally have had experience and held accounts at four of these banks and can say that they all maintain consistent levels of customer service, even if each has a somewhat different atmosphere and style. I personally prefer TD Bank – their online banking service has also consistently won top spot in customer service rankings for the past six years or more.
These aren’t the only banks in Canada. National Bank, Laurentian Bank and Canadian Western Bank are also significant players; and this doesn’t take into account smaller trust institutions either. But for proxies to the Canadian economy, it is the Big 5 we turn to most.
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