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

Technically, if you take any of the first six, you’ll do well. But what if I tell you that Scotiabank (BNS/BNS.TO) gave you a 60% total return over the past 10 years while National Bank (NA.TO) has provided you with 250% overall return? Do you really think that both are equally weighted in your portfolio? It would be like telling me, “Mike, if you invest in any tech stocks, you’ll do fine.” That’s not true. Some tech stocks are good, some are average, and some are just crap.

So here’s my Canadian banks ranking – from number six to one – for the next 20 years. Let me tell you upfront: Laurentian Bank and Canadian Western Bank are not part of the list. The investment thesis for each says it all.

Laurentian Bank (LB/LB.TO) Investment Thesis (OTC: LRCDF)

If you are looking for an overlooked bank with chances of PE expansion, LB could be your candidate. This small bank is trading at a lower PE than its peers (there are reasons why) and pays a solid dividend yield to keep you waiting patiently. Personally, I dislike this bank as it lacks growth vectors due to its small size and lack of presence in the wealth management market. The problem is that LB lacks long term vision. The bank keeps changing its strategies (opening branches to close them 5 years later) and is slowed down by union. During the pandemic, LB is the only bank to have cut its dividend. Do you need another reason to sell?

Canadian Western Bank (CWB/CWB.TO) Investment Thesis (OTC: CBWBF)

The whole idea to invest in CWB is to enjoy Alberta’s oilsands potential. CWB is a classic “savings & loans” bank that is well established in Western Canada… where the money is. Unfortunately, this investment thesis is not as solid as it seems. With the energy market being completely destroyed, CWB will be stuck in a very difficult situation for many years. I find CWB pricey (using the DDM) compared to the Big 5. Also, CWB isn’t the most generous with its dividend yield and we believe there are better opportunities in this sector. Royal and TD should be on your list before CWB.

Enough said for these two.

6. Canadian Imperial Bank – CIBC (CM/CM.TO)

CIBC operates through three segments: Retail and Business Banking, Wealth Management and Capital Markets. Still, it’s a classic savings and loan bank. If you want my full analysis including the last quarter’s review, it is available on that previous article.

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.

Wait a minute… Pros are by far more numerous than the cons? Why is it at number 6? You’ll notice that each point of the pros side comes with a downside. CIBC is not bad, but there are better options. Not really convincing to me! This is why Canadian Imperial Bank is at number six.

5. ScotiaBank (BNS/BNS.TO)

The third largest bank in terms of assets and market cap. BNS has three business segments: Canadian banking, international banking, and global banking and markets. The full earnings review and my analysis were shared here.

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 miss attempts for Canadian banks to enter the US. They made bad acquisitions and failed several times. Look at South America and Central America, you realise 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 system 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.

Overall, I think it’s going to be very hard for Scotiabank in the upcoming years. The dividend is safe, but I wouldn’t bet on that one to outperform the others.

4. Bank of Montreal – BMO (BMO/BMO.TO)

BMO conducts its business through three operating groups: Personal and Commercial Banking (P&C), Wealth Management and BMO Capital Markets. I’ve discussed their latest quarterly earnings and shared a full analysis in this recent post.

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.

All that put together, BMO remains a good pick and a great bank, but I cannot select it as a winner. BMO is therefore closing my bottom three.

3. TD Bank (TD/TD.TO)

Moving on to the top three of my list. So far, I don’t own any of those banks. I don’t own my number three either. TD Bank has an approach similar to CIBC in terms of classic savings and loans, but they did it in a very nice way. It operates three business segments: Canadian retail banking, U.S. retail banking, and wholesale banking. When I reviewed its latest earnings report, I noticed how it remains a strong 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.

Everything is running smoothly for TD. I’m not worried about them. But is it the best we can get from Canadian Banks? Getting close, but not quite there yet.

2. Royal Bank – RBC (RY/RY.TO)

Now my top two favorites! I own both of them. Sometimes number two becomes number one and vice versa, but right now my second favorite is Royal Bank. RY has a strong position in the personal and commercial banking sector (46% of its revenue). I was happy when I reviewed their latest quarter report.

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.

Honestly, there’s not much to dislike about Royal Bank. It could be your number one and would hardly disagree.

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1. National Bank (NTIOF/NA.TO)

National Bank is the smallest of the top six. Actually, a lot of Canadians – especially if they don’t live in Quebec – will talk about the Big Five and discard National Bank because it’s more like a super national bank based in Quebec. . Its smaller size is currently paying off as National Bank was quicker to develop a strong brand in Wealth Management with Private Banking 1859 and built a highly profitable Financial Market division. I also recently reviewed it in this post.

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.

As I mentionned, Royal Bank could be my number one in a couple months. I really like them both. However, the fact that Quebec’s economy seems to be recovering faster than other Canadian provinces has convinced me to put National Bank as my winner!

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!