For Canadian investors there’s nothing more interesting or perhaps important than the banking sector. The Canadian banks have historically crushed the Canadian and U.S. stock markets. It is likely the best performing large cap sub sector in North American stock market history. Of course, past performance does not guarantee future returns. When investing in the Canadian banks, should we buy them all, or use our investing acumen to try and pick the winners? We’re investing in Canadian banks on the Sunday Reads.
I found this in a Bloomberg Canada post …
Since the early 1990s, shares in the Big Five banks – Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO) and the Canadian Imperial Bank of Commerce (CIBC) – have risen in value by 1,750 per cent on average.
We can thank the oligopoly situation in Canada, and a strong-enough economy over the last many decades. The banking sector provides much of the fuel for the economy (loans) and then it milks out every penny that it can. Here’s the performance of the Canadian banking sector vs the TSX Composite from the time of the BMO ZEB.TO ETF launch.
ZEB is an equal weight Canadian bank index. While we might scoff at the fees (recently lowered to 0.28%), we can’t argue with the returns and the benefit of holding them all and rebalancing. That is not behaviour that most investors would be able to emulate. The ETF holds the big 6. The banks with the most recent success will move above that equal weighting, until the next rebalancing. Proceeds are then moved from the most successful banks to the least succesful, at least according to the recent share prices.
The problem with picking the best Canadian banks
Here’s the big 5 coming out of the financial crisis, from January of 2009.
There is a shocking variance in returns.
And yesterday’s winners can turn into today’s losers. BMO was tops for the full period, TD not far behind but they have turned into losers from 2022. And now CIBC has become a favourite of the market. Who knows when things are going to flip? No one.
Not shown (I can only run 5 tickers on testfolio) is National Bank of Canada, and it is the runaway winner in the Canadian banking sector. That is not often a favourite of Canadian self-directed investors. Miss out on NA and you likely underperformed.
Canadian oligopolies – the wide moats
The idea of investing in the Canadian oligopoly sectors (wide moats) is a good one. In fact, there’s none better to my eye. Other sectors include pipelines/utilities, telcos, grocers and railways. They make up the (market-beating) Canadian Wide Moat Portfolio.
In that post link you’ll find the portfolio holdings and the recent performance comparison to the TSX Composite. In that post I also point out my underperformance in the banking sector due concentration risk. I am also paying for not including all of the sectors. Another lesson or three in diversification.
Check out the GIC rates at EQ Bank
Perhaps it’s best to own them all and rebalance, or buy that ZEB ETF.
A proxy for the Canadian economy
Canadian banks trade as a proxy for the Canadian economy. That said, the banking sector will carry, well, sector risk. That’s consumer and business loan risk. And for sure that is a barometer of the risk or health of the Canadian economy, driven mostly by businesses and consumers. But banks can feel it first and take the brunt of the hurt when things turn south.
Recession fears are holding back the banks the past few years. And in fact, Canada is in a per capita recession. Per capita meaning when we factor in population growth. The economy is slowing ‘per person’.
Interest rates cuts will alleviate some of the pressure on loan defaults, and that will be positive for the banks and the economy. And it demonstrates that the Bank of Canada is trying to stimulate the economy. In a Sunday Reads from early August we looked at the potential rate cut path in Canada.
Here’s more on the fresh GDP numbers for Canada. We are eeking out some growth, but it is only supported by immigration.
We’re in a per capita recsssion. And here’s the cummulative effect.
The economic backdrop can certainly present headwinds for the Canadian banks. That said, rate cuts and a change to a more business-friendly federal government might provide some weighty reasons for ‘hope’. The Conservatives are poised for a sizable majority.
I am inclined to be more optimistic and look to the long term success of investing in Canadian banks. I also think that Canada (and voters) will learn from the recent mistake of having a robust immigration strategy without the infrastructure to support the record surge. We will also realize that a strong economy is created on the back of a strong private sector and sensible public programs.
Canadian bank earnings
Last week the Canadian banks reported. MoneySense offered a repost of a bank earnings summary from Canadian press. You’ll find a summary for each bank.
RBC and National led the way, once again. While we want to avoid any recency bias, I would not argue with anyone who overweights to what appears to be superior management with a superior strategy. But once again, we might own them all.
Dan at Stocktrades has long been a fan of RBC and National. That is a recent post, but a consistent theme for Dan and Mike The Dividend Guy.
How are you investing in Canadian banks? Drop your thoughts in the comment section.
Canada vs the world
When we compare Canada to other developed nations and regions, we come back to the basic reason on why we diversify geographically.
But of course the total stock market is not the economy. Canadian stocks (XIU.TO) are up 18.4% in 2024. We’re up over 66% over the last 5 years, and 110% over the last 10 years.
And yes those returns are wonderful but dwarfed by the returns of the U.S. stock market, after the financial crisis. International (EFA) has lagged Canada.
Of course we also have to factor in the value of our dollar. Here’s the Canadian Dollar vs the U.S. Dollar from 2009. Out stock market is underperforming and so is our dollar.
One way to ‘ignore it all’ is to look to the asset allocation ETFs. They are well diversified global portfolios available in single ETFs.
Framing the risk / return proposition
In that thread you’ll see the drawdown and volatility comparisons. We take on more risk for greater returns but we need to invest within our risk tolerance. We also match the portfolio risk level to the goal of each account. An account with a long time horizon can use XEQT, while funds needed in 3-4 years might consider XCNS.
You can also build your own Canadian ETF portfolio.
Feel free to reach out if you have questions.
More Sunday Reads
At Findependence Hub, retirement needs a new definition, and 3 ways to lower the risk in your portfolio.
Also on the retirement front, Fritz at The Retirement Manifesto offers On Your Own – a look at widowhood.
Dividend Hawk looks at his stock earnings reports for the week, including a few of the Canadian banks.
At Banker on Wheels, a timeless approach to asset allocation. Also in the mix is the win rate for the 60/ 40 portfolio.
At Tawcan, Bob wonders if there are ETFs you should be avoiding.
Bell is (almost) junk.
This past week, Moody’s downgraded Bell’s debt to one level above junk. I’ve added the link and some additional commentary to my post –
Selling half of my Bell stock.
And for Seeking Alpha Readers, the latest on our U.S. stock portfolio.
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“ Last week the Canadian banks reported. RBC and National led the way, once again.”
I think you missed the mark by not including CIBC here. Their results were every bit as good as RY’s.
I cannot speak to NA, as a westerner I missed the boat on this one.
CM had a solid report, yes.
Once read an article about CDN banks. The gist of it was “don’t bet against the CDN banks”. Something I have kept in mind. Just bought as many as I was able to of CM when it went below $50 Cdn. It pays me 7% now and the cap gain if impressive. I always look at the 5 year charts and refused to buy even the best and well managed companies if they are near their peak. What goes up must (usually) come down. I’ll wait.
On BCE my Sis I.L. (A CPA) as well as my Son I.L. (Financial analyst) have both mentioned how good BCE is looking. Told them I wouldn’t consider them unless the stock was somewhere in the <$40 range. Bought the majority of my BCE after the Ontario pension fund's failed bid for BCE back in the 2010 time frame. Unloaded a lot in 2019 at just over $65
Do I time the market? Yes and no. As I said above I will not buy high.
I remain fully invested so usually do not have a lot of spare dinaro hanging around.
RICARDO