I repeatedly see questions on Social media such as – “TD or RBC?”, “Is BNS a buy at this rate?”, “Which is the best bank to buy?”, “Is NA worth a shot?” etc, and have met few people asking the same standard questions personally. Canadian banks have a strong global reputation for safety and reliability and are recognized worldwide. Their names often appear in sentences also having words such as Mature, Stable, Predictable, Consistent and it is because of sound Canadian regulatory framework and relatively risk-averse approach. Most of these banks are amongst the oldest ones on earth and have a long history of dividend payments and growth; in fact BMO started paying the dividends in 1829. Can you believe it?! Almost 200 years of rich history of banking and dividends. Top 6 banks of Canada are Royal bank, TD, Bank of Nova Scotia, BMO, CIBC & National bank and contributes hefty 25% of entire TSX60 market capital and hence financial sector is considered the backbone of Canadian economy. Nearly 375,000 people (including myself!) are employed by these 6 banks and hence are graciously supported by federal & provincial governments in the time of crisis. While the past history or track record do not guarantee future performance, the whole ecosystem of regulations and sheer vastness makes them “safe”, “too-big-to-fail” and are hence considered must-haves in any Dividend portfolio.
Below I take a stab at putting together some basic metrics for top 6 Canadian banks and also take the liberty to explain them in the simplest form. Some of the numbers mentioned here may be teeny weeny off and you should look at the latest data for accuracy. I gathered them from variety of sources such as Google Finance, CDASL August’20 spreadsheet, FinBox, as well as Investor’s page of respective banks. Since dividend plays a key role in my personal financial independence journey, I will start with dividend data comparison itself, the favourable metrics are highlighted in Green.
As per the latest share price, BNS commands the highest dividend yield of 6.53% and dividend payout ratio is about 64%. Though high yield shouldn’t be chased and I have personally gotten burnt by tempting yields, it surely is worth pursuing as it is unlikely that BNS will cut the dividend. If you go by safe yardstick of less than 50% payout ratio then National bank looks far better in comparison to others and the 4% yield is not bad at all. If dividend growth entices to you the most then TD is by far the best, averaging 9.5% growth in last 5 years (or 9% in last 10 years). Accordingly chowder ratio (coined by Seeking Alpha contributor Chowder) is highest for TD. Chowder rule is the sum of current dividend yield & 5 years of average dividend growth rate, normally the higher it is the better as it signifies the company is having both good and growing dividend. Lastly, each of these banks have a history of good dividend growth streak of 9-10 years.
Next set of metrics will give you a glimpse on financial data and health of these six banks starting with 5 years Compound Annual Growth Rate (CAGR) and both BMO & CIBC fairs well, meaning their revenue grew faster than other banks.
CAGR in simple term is an average of year-on-year revenue growth for set number of years and below is a 5 years CAGR example from finbox website for Royal Bank.
Next column is the Price-to-Earnings (PE) ratio and as highlighted in Green, Bank of Nova Scotia has lowest value meaning it is the cheapest stock at present to buy. This metric is used to find out whether a company is overvalued or undervalued and the lower the value the better it is. As the name suggests, PE ratio is the ratio of a company’s share price to the company’s earnings per share (more on this in next paragraph). PE ratio comparison should always be done with the peers and companies under same sector meaning a Bank’s PE ratio shouldn’t be compared with a Technology stock.
On the other hand Diluted Earning per Share (EPS) is highest for CIBC amongst all banks, higher EPS is the sign of higher earnings, strong financials and hence a reliable company to trust for your hard earned money. There are two type of EPS – Basic & Diluted and the former is always higher than the latter. Below is a simple yet excellent visual showing the difference between them, it is sourced from slideshare.net which I also find quite useful to understand various fundamentals in easy forms.
Going back to data comparison, be mindful that CIBC may be leading the diluted EPS race at present but it decreased by 17% over Q3 2019 and if you look carefully the diluted EPS didn’t changed since last year for National bank! So focusing on just the present value of any metrics is not wise, the trend should also be taken into consideration. National bank also netted the best Profit margin among all other banks, little over 32% and the net profit margin increased about 2% year over year. This tells a great success story about National bank especially since this Q3 ending result had 5 months of Covid pandemic outrage. It is also worthwhile to mention, it is the only bank whose profit margin increased over last year, every other bank’s profit margin decreased minimum by 9%! The last piece of financial information I am showing is Net Income, which in itself is a relative term. Royal bank’s net income was more than 3B but then it’s market value is also more than BMO, CIBC & National bank combined! On the other hand, Net income for National bank was only 589M but notably it is the only bank whose income decreased the least year over year. I think the last two metrics tilts the comparison a bit in favour of National bank, so they should be looked as key outlier and deserve some more thought and research.
Besides above metrics I also documented some additional data in a google sheet, feel free to copy and use however you want. But before I wrap up I would also like to point your attention to two other factors which should also be considered while making any decision. First is Credit Quality also known as Provision for Credit Losses (PCL), in simpler terms it means expected losses from bad loans that may become a reality in future. Each bank keeps a track of such potential loss and report it as part of their quarterly results. As of Q3 for fiscal year 2020, TD reported the lowest PCL of 32 points and Bank of Nova Scotia reported the highest with 58 points. If such loss materializes then it may have severe influence on future earning and results and eventually impact the share price. Second point to keep in mind is bank’s diversification outside Canada and both BNS & TD leads the pack. BNS is the most diversified bank with presence in USA & Latin American nations such as Chile, Caribbeans, Mexico, Peru & Colombia and on the other hand TD is having a noteworthy presence in USA generating 35% net income from south of the border. Royal bank, BMO & CIBC also have significant presence in USA but National bank is having negligible diversification. In extreme case of Canadian economy slowdown, diversification may provide cushion to the bank’s performance and well diversified bank shall do better.
I am no financial analyst or advisor and fairly new to looking at numbers myself and apologies if I confused you even further or misled in any way. While I can’t point you to a specific bank to buy, we personally have CIBC as our biggest holding and a little bit of BNS in our Dividend portfolio. I am learning new things everyday as getting more serious about investing our hard earned money in stock market. I believe our future literally depend on quality of shares we buy now and it is important to do some level of due diligence before owning a piece of any company (well most of the times if not all the time!). I must admit the whole process is not that simple but I can also tell you that for me personally, writing helps. It gives me an opportunity to do some research and in the process teaches a thing or two! I hope this honest and humble attempt of mine may help you at least with the data if not with the decision.
Happy Investing and Good luck with whatever you buy!
