Canadian banks are amazing; they have outperformed the Canadian stock market for the past 5, 10, 15, probably 25 years. Unfortunately, they were not created equal. That’s a myth. Then, which Canadian Bank is the best?

Since the 2008 financial crisis, each member of the big six (Royal Bank, TD Bank, ScotiaBank, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank), took a different direction.

They all benefitted from the oligopoly environment in Canada to fund new growth vectors. 14 years later, if you pick the wrong bank, you will be leaving a lot of money on the table.

Let’s take a look at our Canadian Bank Ranking from position 6 to 1.

But first, let’s review their latest quarterly earnings:

#6 ScotiaBank (BNS.TO)

BNS is the most international bank in the Canadian banking industry. It has significantly expanded its business outside of Canada with 40% of its assets outside the Canadian border. This hasn’t always been an advantage as BNS ran into its share of problems with South American economic struggles. The bank reduced its international footprint and has limited it to 30 countries currently, from 54 in 2013. Expected GDP growth for these countries is quite attractive (higher than Canada and the U.S.), but this comes with much uncertainty and volatility. BNS is now a dominant player in Chile with its most recent acquisition of BBVA Chile in 2018. The bank has a strong track record of acquiring and integrating businesses. The most recent quarterly results show an economic recovery across the Pacific Alliance, a lower provision for credit losses, growth in wealth management, but lower income in capital markets.

Pros:

Best diversified, most international: For over a decade, BNS focused on growing outside Canada (especially in Central America and in South America). Obviously, their Gross domestic product (GDP) growth rate is better than US and Canada. Their perspective moving forward is also better (they should grow at a 3%-4% rate while it will be hard to reach over 1%-2% in Canada and the US).

Cons:

International exposure brings uncertainties: Before the pandemic, BNS had a great story, but they never capitalized on it, and they never outperformed other banks. Why? It’s complicated to do business in Central America! It took several years and several missed attempts for Canadian banks to enter the US. They made bad acquisitions and failed several times. Look at South America and Central America, you realize it’s a lot more complicated than making loans in the US. It’s even worse with the pandemic as countries with lower resources and weaker healthcare systems will face more problems than in North America.
Worst performing stock from the top 6 over the past 10 years. With all the difficulties I just mentionned, I’m not expecting them to reverse that trend in the upcoming months and the upcoming years.

#5 Canadian Imperial Bank – CIBC (CM.TO)

While CIBC lags behind the other banks on the stock market (along with ScotiaBank), it gives investors the opportunity to pick up a generous yield without significant risk. We like that they want to grow their wealth management division, but the integration of Private Bank will represent a crucial step. If an investor is looking for additional income, CM is probably one of the best picks on the Canadian stock market; it just can’t be expected to outperform the banking industry over the long run. CIBC is trading at a low PE ratio versus its peers since it has lower growth expectations. On the bright side, the dividend is not at risk, and an investor will enjoy consistent increases. CIBC will likely be a good fit for a retirement portfolio since it offers the stability of a top 5 Canadian bank with a decent yield and the security of future dividend growth. We must add that the bank has done very well in 2021 and its recent results pushed CM’s price to its highest price level in history. Let’s put it this way: it’s hard to perform poorly when you invest in a Canadian bank!

Pros:

High yield with a relatively low payout ratio: When you do the math, a low stock price brings a higher yield. A low PE ratio also brings a high yield and so the stock price is low…
Mortgage loans: The mortgage side is doing well as housing market in Canada is doing well. But when your biggest growth vector is mortgages right now, I don’t think it will result in outperforming the other banks.
Private banking and wealth management: Smart move, but a little late. CIBC is a small player in this ground compared to the others.

Cons:

Lack of growth vectors: With interest rates super low, interest margin will be squeezed. CIBC’s only way out is to do more loans. That could be a very difficult path in the next years considering the consequences of the pandemic on the economy.

#4 Bank of Montreal – BMO (BMO.TO)

BMO decided to take the stock market path to ensure its growth. It was the first Canadian bank with its own ETF on the market. Competition is fierce but being among the first Canadian issuers surely helped to build momentum in a growing market. Over the years, BMO concentrated on developing its expertise in capital markets, wealth management, and the U.S. market. BMO also made innovative moves such as the introduction of its own ETFs and a robo-advisor. Growth will happen in these markets for banks in the coming years. BMO is well-positioned to surf this tailwind. Keep in mind BMO’s results are often more hectic compared to its peers due to its capital market business segment. The bank has been the less generous in terms of dividend growth between 2010 and 2020. However, it came back strong with the most generous dividend increase in 2021 (more on that in the dividend growth potential section).

Pros:

Focus on capital markets and wealth management: They were the first in the country to have their own ETF suites. They saw where the market is going, and they took advantage of it. They were also among the first Canadian banks to make a move towards private banking with the acquisition of Harris Bank in Chicago. They’re well established in wealth management and in capital market and I like that.
Well established in the States.

Cons:

Revenue and earnings are more volatile: Because of that focus, their revenue and earnings are more volatile or riskier. Their dividend growth perspective versus the other five is lower.

#3 TD Bank (TD.TO)

Over the years, the bank has been increasing its retail focus, driven by lower-risk businesses with stable, consistent earnings. The bank enjoys number one or two market share for most key products in the Canadian retail segment. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has substantial exposure in major cities like Toronto, Vancouver, Edmonton, and Calgary, combined with a strong presence in the US. With about a third of its business coming from the U.S., TD is the most “American” bank you’ll find in Canada, with roughly 1/3 of its business coming from south of the border. If you are looking for an investment in a straightforward bank, TD should be your pick as increasing retail focus, large market share in Canadian banking, and U.S. expansion are key growth enablers for TD Bank.

Pros:

Revenues (a third) coming from the US: They really caught up that game from their southern neighbors; they know how they want to deal; they have a great exposure over there.
Largest amount of assets in Canada.
Doing things simple but doing them the right way: They have been doing very well for the past 10 years.
Strong wealth management: Their segment from Ameritrade did very well, and now they’re selling to Charles Schwab.

Cons:

High exposure to mortgages: Hot markets such as Vancouver and Toronto could cool down a lot at one point in time. If we get into a housing bubble, then it’s going to be harder for TD.

#2 Royal Bank – RBC (RY.TO)

Royal Bank counts on many growth vectors: its insurance, wealth management, and capital markets divisions. These sectors combined now represent over 50% of its revenue. These are also the same segments that helped Royal Bank to stay the course during the pandemic. The company has made significant efforts in diversifying its activities outside of Canada and has a highly diversified revenue stream to offset interest rate headwinds. Canadian banks are protected by federal regulations, but this also limits their growth. Having some operations outside of the country helps RY to reduce risk and improve its growth potential. The bank posted impressive results for the latest quarters driven by strong volume growth and market share gains which offset the impact of low interest rates. As interest rates are expected to rise in 2022 and 2023, RY is in good position. Royal Bank exhibits a perfect balance between revenue growth.

Pros:

Battling with TD to be the largest bank in terms of assets: They’re well established across all of Canada.
Rouhly 50% of their revenue are coming from classic banking activities: Which means only 50% is subject to the interest rate squeeze.
The other half is about wealth management, capital market, and insurance: They have been able to do lots of cross-selling across those segments, they are maximizing their presence in the wealth management, and they had a huge deal with BlackRock for ETFs.
Outperformed the average bank in Canada in terms of market: Recently, they have also shown their strenght in terms of earnings.
Strong dividend growth policy in place: Don’t expect any dividend increase for the rest of 2020 from any banks. I’m pretty sure Royal Bank (and other Canadian banks too) will wait a little, see how things go, see how their loan book is being affected, and then they may resume in 2021 or 2022. Still, the dividend is safe.

Cons:

Royal Bank could also get hurt by a bearish housing market: This is a rather small downside considering RY’s strenght and ability to face headwinds.

#1 National Bank (NA.TO)

NA has targeted capital markets and wealth management to support its growth. Private Banking 1859 has become a serious player in that arena. The bank even opened private banking branches in Western Canada to capture additional growth. Since NA is heavily concentrated in Quebec, it concluded deals to do credit for investing and insurance firms under the Power Corp. (POW). The stock has outperformed the Big 5 for the past decade as it has shown strong results. National Bank has been more flexible and proactive in many growth areas such as capital markets and wealth management. Recently, NA is seeking additional growth vectors by investing in emerging markets such as Cambodia (ABA bank) and in the U.S. through Credigy. Can it have more success than BNS on international grounds? It looks like they may have found the magical formula to do so!

Pros:

One of the fastest growing wealth management businesses in the country: They have a very strong brand recognition there. Since they were doing a lot of loans in Western Canada, they actually opened private banking branches there too. Not regular branches where everybody can go, but selling points where private consultants and private bankers could be there for their clients.
Strong in capital markets: They’re very active on the market. This creates more volatility, as it is the case with BMO, but overall, they’ve been doing well, and they’re making more money.
International branch and US segment: In the international, they focused on Cambodia. They completed the purchase of ABA Bank over there. They’re trying to create growth outside of Canada, but they’ve selected emerging markets in Asia instead of South America.
Heavily based in Quebec: In the past, it was a reason to lie a little behind, but over the past 10 years, Quebec has proven its resiliency. They’re not dependent on energy to grow their economy; they have a Canadian economy similar to Ontario. They’re doing well. In the pandemic, Quebec has been hit with a lot of cases, but its economy seems to be on the way to recover faster than the other banks.

Cons:

International branch and US segment: We’re going to see how it goes. It’s not my favorite part of their business model but I like the fact that they try to diversify.

Final Thoughts

Canadian banks could be compared to the salt you use in your hearty fall soup. Some salt in it is making it tasty and great. Add too much salt and it is totally ruined. Act with the same caution for Canadian banks. Pick one or two, but don’t add too much in your portfolio!

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