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 60 Largest Public Companies (aka the S&P/TSX 60)
Canada’s Conservative Banking System
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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
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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).
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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.
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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.
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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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{ 20 comments… read them below or add one }
It’s interesting to see how well National Bank (Quebec) and Canadian Western Bank have done. NA is up 100% since the lows and CWB is a solid stock with great potential too. I’ll never forget what a deal we had in March when I bought into 3 of the major banks in Canada.
It bears noting that TD and RBC are often referred to as the Big 2 by bank analysts given they seem to be pulling away from the rest of the pack due, in large part, to superior retail operations and strong marketing power respectively.
Canadian banks have hard time spending excess capital because they can’t expand domestically. The Canadian market, tiny as it is, is tapped out and now they are just stealing from one another (hence, the push to sell insurance on a retail level) BUT none of the banks have had any sustained success in the U.S. market (Harris is getting squeezed in the mid-west market by B of A’s acquisiton of LaSalle). Of course, the larger question is do you want to expand in the U.S. or are there better growth areas elsewhere?
@Thicken – well said. I’m glad to see Scotia expanding elsewhere – and I know Manulife (not a bank) has a position in China too – but Canadian banks really do need to diversify internationally. That said, most Canadian companies need to diversify away from the U.S. as the main trading partner, in my opinion.
I currently have some form of account at all these banks except BMO… does that count as diversification?
I plan to buy all five of these as part of my upcoming Smith Manouvre. While I don’t mean to time the market, my expectation of a double dip is making me hold off for now.
@Tom – I need to learn more about the Smith Manoeuvre. Frankly, I don’t think adding BMO to your portfolio at this point would give you much more diversification:) Even though BMO is one of my core holdings. I own some of all the Big 5, and am looking to purchase some NA as well. I’m still unsure of whether we’ll see a full-on double-dip, but I do expect at least a mild correction in the Big 5.
Thanks for the profile, good to know. Can you guys provide more thoughts on the PRESTIGE of working for any of these banks? Is it considered highly desirable to work for RBC’s investment banking and equities divisions specifically out of school?
Thnx
@FS – work at any of these banks is pretty decent and respectable. That said, there also isn’t any (much?) “rockstar” status associated with it either, the way there seems to be with, say, MBA students salivating over Goldman Sachs. (None of the banks are in bed with the Canadian government as GS is, either.) Others can correct me if I’m wrong.
@ MonEn – I C. What’s funny is I have a friend who works at RBC and his company has in some of their propaganda literature “RBC is the Goldman of Canada!” haha.
Would you say that MBA students in Canada salivate to work at Goldman, or the Canadian Banks instead?
Also, any idea if it’s still extremely difficult to join GS out of business school? What type of person gets into GS if so? What about the other banks such as MS, DB, CS, JPM etc?
@FS – Not sure about that – you should ask your friend and come tell us!
Ok. BTW, are you currently an MBA student now or do you work? If you work, what field are you in?
I am a big fan of Canadian banks not sure however if their strength is due to the strict government regulations or if it is due to excellent management. I think we may need some more competition in Canada from a consumer perspective but as a shareholder I enjoy my strong dividends :) As for expansion Canadian banks have been doing a good job picking up banks in the US, TD continues a fairly aggressive (relatively speaking) US expansion plans.
MoneyEnergy – Did I ask a wrong question? I read your about page and it says you are a grad student, however it seems like you are out of school already with your market commentary (compliment!).
I’m just curious to know what you want to do once you graduate, and how the job market is from a student’s point of view?
Sam- When the government allowed plain old banks to purchase i-banks, the race was on to purchase Wood Gundy which was seen as the prize catch. CIBC outbidded RBC for it who “settled” for a white shoe firm known as Dominion Securities (”DS”). The Wood Gundy exeuctives basically took over CIBC and, depending on your point of view, either turned the bank into too much a risk taker or grew the bank.
DS also took over RBC but they built themselves a much larger and more stable franchise. RBC DS (as their investment bank division is known) is consistently on top in the dealer charts both in terms of number and size of underwritings.
DS has a reputation, deserved or not, for being conservative in corporate culture. It recently acquired a spot as a primary market dealer for the Federal Reserve of NY and I believe has many trading seats outside Canada than in Canada. I can’t tell you if its comparison with GS is valid but Big Blue (as RBC is known in some circles) is the dominant player in all things banking in Canada. It is either 1 or 2 in almost all categories.
Thicken – Thanks for the insight! It’s interesting too here in the US, that most who want to get into finance don’t have RBC, CIBC etc in their top picks. So, i’m wondering if that’s the same for Canadian students who want to get into the industry, not having US banks in their top picks.
I’d love to get MoneyEnergy’s perspective given she’s in grad school, but I guess she’s away this weekend. Ahh to be a grad student again. It was so much fun, without any responsibilities (except for getting a job) in the world! :)
Thnx again!
@FS – I can’t directly speak as to how many Canadian MBA students end up looking at US banks for starting careers – statistically, worldwide, there is more of a tendency for a certain percentage of non-U.S. students to look to the U.S. for career advancement, as I am sure you must know – in all fields, not just banking. It does not surprise me that not many U.S. MBA students even think of or are very aware of some of the world’s top banks in Canada. … Thicken is right about RBC as the #1-2 player in most categories.
Thnx MoneyEnergy for your thoughts. What about you though? What are you looking at getting into post grad school? Is it safe to assume something in investments/finance given the topics of your blog? I think you’d be really good at it since you’re so into investments!
I’d love to get an idea how whether you’re hearing fellow classmates land summer internship positions and stuff. I know my firm is stepping up hiring out of B-school, as I’ve been to a couple b-school career fairs already.
Rgds,
Sam-urai
@FS – Thanks. What kind of firm are you at? Send me an email and we can discuss further.
Is anyone DRIPing CM, BMO or BNS?
I’m going to increase my holding of each in 2010, and I’m wondering if others are going to do (or are doing) the same?
Happy Holidays!
I DRIP each of those – sounds good to increase holdings of each, with consideration of their current differences, of course. BMO has improved recently and BNS has just expanded into Dubai – the first Canadian bank to have done so.
Yeah, all three of those “big 5″ are good DRIPs I think. I’m going to try and contribute a few thousand to each in 2010.
Staying with financials, I like SLF too, although I’m not sure I’ll have the cash to contribute to that AND the banks!
I’m looking forward to 2010 to start my Waterhouse TFSA and hold a bank stock in there too!