Wednesday, October 14, 2015

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$).
The following charts provide an overview comparing the banks

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.

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.

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.

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.

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.

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