Looking For The Best Canadian Bank Stocks? Look No Further
Regardless of your investment philosophy, most Canadian retail investors will have one thing in common when it comes to their portfolios; they include Canadian bank stocks. Why? Well, for starters, every one of these banks on this list is a Canadian Dividend Aristocrat.
If you are looking for growth, or income, Canadian banks have rewarded investors and will continue to do so for years to come. They are the backbone of Canada’s stock market and among them are some of the safest blue chip companies in the world. We looked for Canadian bank stocks that pay dividends, have consistent growth, and a solid foundation in this guide.
If you’re looking for more consistent income, have a look at our list of the best Canadian monthly dividend paying stocks.
The Canadian banking market is highly regulated and as such, there are massive barriers to entry.
The Big 5 are incredibly important to the Canadian economy as are some of the smaller regional players such as National Bank of Canada and Western Bank.
A Canadian bank stock can serve as a cornerstone of one’s portfolio, is low-risk, provides growth and a steady income. After weathering the financial crisis better than most all world-banks, the Canadian banks were also among the first to re-instate a rising dividend.
On top of historical performance, the banks are currently enjoying some tailwinds which have the potential to propel the sector even higher. The Canadian economy is growing at a fairly good clip, good enough for the Bank of Canada to start rising interest rates, twice in the past 6 months.
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6. Goeasy Ltd (GSY.TO)
Goeasy Ltd (TSX:GSY) was placed on this list of the best Canadian bank stocks primarily due to the surge in alternative lending use.
The stress test placed among Canadian buyers recently has reduced their buying power by up to $70 000, and many are flocking to alternative lenders. Why? Well, because they don’t have to follow the strict regulations placed on major Canadian banks.
Goeasy has recently increased its loan range from $500-$15,000 to $15,000 to $30,000, which is currently an $18 billion dollar market. The company plans to open up to 40 new locations in the next couple of years and plans to increase its loan portfolio to over $1.3 billion, which is an increase of over 35%.
Goeasy is a contrarian pick on a list of the best Canadian bank stocks, as most of the stocks found below are better suited for investors looking for income. However, you’d be surprised at how fast the Canadian small-cap alternative lender is growing its dividend. Goeasy has a 5 year dividend growth rate of over 21%, and most recently raised its dividend by over 37%.
It has raised dividends for 4 straight years, and currently provides a yield of 1.82%. In terms of growth, expect Goeasy to be one of the fastest growing Canadian bank stocks in the country. Analysts expect the company to grow by over 26.60% next year. The company is only trading at 10.61 times forward earnings and 2.60 times book value, so all things considered Goeasy is trading at a discount.
YTD Gain: +67.43%
Payout Ratio: 24.21%
1Yr Target Price: $56.11
5. Canadian Imperial Bank of Commerce (CM.TO)
CIBC (TSX:CM) is a global financial institution. As one of Canada’s Big Five, it provides a range of financial products and services to over 11 million individual, small business, commercial, corporate and institutional clients.
CIBC has made large acquisitions south of the border over the last couple of years, and the U.S. market, which as of now has a stronger economy, should drive more growth and diversify the company’s operations. CIBC has the largest yield out of any Canadian bank stock on this list at 5.32%.
The company has a payout ratio of only 36%, the lowest among its peers as well. CIBC has a 5 year dividend growth rate of 7% and has raised dividends consecutively for 8 years. CIBC is the cheapest Canadian bank stock on this list, and has been for a few years running. The company is trading at a forward price to earnings of only 8.14 and only 1.33 times book value.
Analysts have placed a 1 year target price on the stock of $114.87, which indicates nearly 12% upside. Investors will have to keep an eye on CIBC’s growth south of the border, as the bank has often been criticized for being too exposed to the Canadian economy.
Investors are hesitant because of this exposure, and as such CIBC was the worst performing bank in 2018 and has been one of the worst performing Canadian banks in the past 5 years.
YTD Gain: +11.02%
Payout Ratio: 48.38%
1Yr Target Price: $111.20
4. Bank of Montreal
The Bank of Montreal (TSX:BMO) has the longest active dividend streak in Canada, paying dividends for more than 188 years.
The feat is simply incredible, and speaks to both its longevity and consistency. The Bank of Montreal provides a wide range of banking services, including wealth management, investment banking, personal banking and business banking.
The company is currently ranked 4th out of Canada’s Big 5 banks in terms of market cap. The company is actively looking to adapt to today’s investment trends, including launching its Smartfolio platform. Smartfolio is a Robo-Advisor platform, and BMO is the first out of the Big 5 banks to implement one. For those who are weary about the current state of the Canadian housing market, take note that BMO has the lowest exposure out of the Big 5 banks to the market.
The company currently has a dividend growth streak of 7 years and the lowest payout ratio on this list of 41%. BMO yields 3.96% at the time of writing, and has a 5 year annual dividend growth rate of 5%. Analysts have placed a 1 year target price of $108.85 on the company, signaling 10.2% upside.
BMO currently trades at 10.47 times forward earnings and 1.41 times book value, making it one of the cheaper stocks on the list.
YTD Gain: +10.39%
Payout Ratio: 42.22%
1Yr Target Price: $102.85
3. Royal Bank of Canada (RY.TO)
The Royal Bank of Canada (TSX:RY) is Canada’s largest bank by market capitalization and was named the most valuable brand in Canada.
The company is the most internationally diverse Canadian bank stock with operations around the world. However, RBC is still very dependent on customers right here in Canada, with over 61% of its revenue coming from the country. Royal Bank has captured the highest market share in several Canadian retail banking products, including Personal Lending, Total Mutual Funds, Business Loans and Deposits.
Over the last 5 years, RBC has returned 43% (7.2% annually) to shareholders, making it one of the best performing Canadian banks. The company has one of the best dividends in the country, yielding 3.75% at the time of writing. Royal Bank’s payout ratio is only 45%, and the bank has a 5 year dividend growth rate of 8%.
It has raised dividends for 8 straight years, with its most recent increase matching its 5 year growth rate at 8%. Analysts expect the company to grow at a rate of 5.47% over the next 5 years, and have placed a 1 year target price of $111.93 on the company, indicating 6.6% upside.
Couple this with a fairly reasonable valuation (11 times forward earnings and 1.98 times book value,) and you have one one of the best Canadian banks to own today.
YTD Gain: +13.61%
Payout Ratio: 45.61%
1Yr Target Price: $108.27
2. Bank of Nova Scotia (BNS.TO)
The Bank of Nova Scotia (TSX:BNS) is the third largest Canadian bank by market cap. The company offers a wide variety of services to both Canadians and international customers.
With over 25 million customers and net assets close to $1 trillion, the Canadian bank has a very heavy Canadian and international presence. The Bank of Nova Scotia is one of the more aggressive Canadian banks in terms of acquisitions.
Since 2013, the company has spent over $13 billion on acquisitions and almost $7 billion of that has taken place over the last couple of years. The Bank of Nova Scotia has since said it will be taking a break and focusing on integrating new acquisitions into the fold, however it still expects to grow both Canadian and international earnings by 7% and 9% respectively. The company has the second highest dividend yield of all major Canadian banks at 4.89%, beaten only by CIBC.
It has raised dividends for 8 straight years and has a 5 year dividend growth rate of 6%. This is substantially lower than our number one stock TD Bank, but it is still a solid growth rate from an already high yielding stock. Scotiabank has been one of the worst performing Canadian bank stocks as of late. But, there is good news.
As history has shown, the worst performing Big 5 bank has often resulted in returns of 20% or more. The company is currently trading at only 9 times forward earnings and 1.33 times book value. Add an analyst 1 year target estimate of $78.15, which indicates upside of nearly 13% from today’s price levels, and it is easy to see why the Bank of Nova Scotia is one of the best bank stocks to buy in the country.
YTD Gain: +11.14%
Payout Ratio: 51.65%
1Yr Target Price: $77.92
1. TD Bank (TD.TO)
TD Bank (TSX:TD) is our best Canadian bank stock to buy for the third year running.
TD Bank is a multinational banking and financial services firm which started operations in 1855. TD Bank is one of the largest banks in Canada by total assets and second largest by market capitalization. The financial giant has operations in both Canada and the United States and was named one of the most convenient banks in the U.S. TD Bank has a very prominent set of operations in the United States, which make up more than 40% of its overall revenue.
This is beneficial to investors as it is not exposed to rising Canadian interest rates like other Canadian bank stocks. If Canada’s economy slows down, TD Bank still has its U.S. assets to drive revenue. The company has benefited heavily from the reduction in corporate tax rates introduced into the United States last year, and looks to take advantage of a strong US Economy.
Over the last 5 years TD Bank has a compound annual growth rate of over 10% on its earnings and has a medium term earnings growth target of around 7-10%. This is the highest growth rate among other Canadian bank stocks. In terms of its dividend, TD Bank is best in class in terms of major banks.
The company current pays a yield of 3.57%, has raised dividends for 8 straight years and has a 5 year dividend growth rate of over 10%. The company’s payout ratio is only 44%, and its dividend accounts for only 59% of operating cash flows. If you’re looking to invest in the best Canadian bank stock today, I’d be looking to pick up TD Bank.
YTD Gain: +11.33%
Payout Ratio: 44.83%
1Yr Target Price: $78.93
What should I look for when picking Canadian Bank stocks?
We alluded to it earlier, but there are two main groupings of Canadian banks, the Big 5 and the smaller regional players. The Big 5 are not only the largest Canadian bank stocks by market capitalization, but they also have operations south of the border and many have international operations.
On the other hand, the regional banks are mainly focused on the Canadian market with little to no international operations.
Interest rates are always a hot topic and rising interest rates are a positive for banks. Rising rates result in a larger spread between lending rate to customers and the rate to which it pays its debtors.
As a result, they have a positive impact on profitability as net interest income (NII) margins rise. Banks in which retail earnings account for a high percentage or income will be best positioned to benefit.
Could rising interest rates hurt the outlook of Canadian banks today?
On the flip side, there is the risk that rising interest rates will result in greater loan defaults. It’s no secret that ultra-low interest rates have led to a significant amount of borrowing and Canadians are now more indebted than at any other point in history.
Of particular concern is Canada’s housing market. Pundits have been calling for a housing crash for years as low rates have sparked home prices to rise significantly, especially in the Vancouver and Toronto markets. The concern was real, and the Canadian and Provincial Governments have stepped in and introduced new mortgage rules to curb high prices.
The result is being felt as house prices have started to taper and sales have also started to slow. The good news is, so far the impact has been gradual and hasn’t resulted in a hard crash like the U.S. experienced during the financial crisis. It is important to understand and keep tabs on housing as Canada’s banks have a good number of these mortgages on their books and a hard crash could result in high defaults and write downs.
Banks that have a high percentage of their mortgage portfolio in the larger centers such as Vancouver and Toronto are particularly vulnerable to this risk.
Canada’s bank stocks pay rich dividends
You can’t have a conversation about banks without discussing dividends. Canada’s banks were the envy of most when, unlike their U.S. peers who slashed dividends, they managed to weather the financial crisis without cutting their dividends.
The question now becomes, who is best positioned to continue raising dividends and at what rates? Look for banks that have raised for at least 5+ years and have a clear dividend policy. If you’re looking for some of the best dividend stocks to buy, check out our list of the top 28 in Canada.
Look at the bank capital adequacy ratio
Another key metric to review is bank capital adequacy ratio. These legal requirements (Basel Accord III) were implemented to address deficiencies in financial regulation exposed by the financial crisis. Specifically, the Tier 1 Capital ratio (CET1) evaluates a bank’s financial strength and can be used to as a quick reference to gage a bank’s capital strength.
Investors can also use this ratio to compare banks against each other and the higher the CET1 ratio, the better. Of note, according to the Basel III Accord, banks must have a minimum CET1 ratio of 4.50% by 2019. In Q3, Canadian banks averaged a CET ratio greater than 11% and are well positioned to weather a downturn in the economy.