Canadian bank stocks have hit a rough patch over concerns about the slowing Canadian economy, depressed oil prices and falling interest rates.
This out-of-favour status makes them look like tempting opportunities for long-term investors who love the steady flow of dividends – but it's time to see the big banks as individuals rather than a uniform bloc of blue suits.
This isn't easy. The big banks report their quarterly financial results within a seven-day period, encouraging us to lump them together and look at trends rather than differences.
In the first-quarter reporting season, which concluded on Tuesday, the overall picture was hardly upbeat: Though most banks raised their dividends and expressed optimism about the year ahead, they generally delivered lacklustre growth and warned of a challenging environment.
Low interest rates are eating into the banks' interest income and cheap oil is threatening the Canadian economy – and with it, the housing market, employment and appetite for loans.
These aren't ideal conditions for the banks, which explains why the S&P/TSX commercial bank index has slumped about 9 per cent from its high in September.
That offers an intriguing entry point – and attractive dividend yields of about 4 per cent – for anyone willing to look beyond the near-term headwinds and focus instead on the longer-term performance of bank stocks.
Indeed, it's hard to lose if you buy and hold. Over the past decade – a period that includes the devastating financial crisis and subsequent bear market – Canadian commercial banks have delivered overall gains of 170 per cent, after factoring in dividends. That beats the broader S&P/TSX composite index by 63 percentage points and it also beats the S&P 500, the U.S. benchmark index, by more than 50 percentage points.
Here's another way of putting this performance into perspective: If your timing had been particularly bad, and you bought bank stocks at their prefinancial crisis peak in 2007, you'd still be up 74 per cent today.
This demonstrates that Canadian banks are pretty much bulletproof, making them particularly attractive stocks for anyone who can ride out the occasional volatility or gather the strength to buy into the dips.
Where do you start? It's not at all difficult for many investors to buy all the banks, or invest in a bank-heavy exchange-traded fund, and minimize the risk of investing in a dud.
But Canadian banks have been keen to diversify beyond their domestic bases in different ways, giving investors a number of options for selecting a potential outperformer.
Strategy on banks
Toronto-Dominion Bank
One-year total returns: 13.1 per cent
Toronto-Dominion Bank is focused on retail expansion into the United States, with more bank branches there than in Canada. That makes the bank a good bet for anyone expecting the U.S. economy to continue to wow the rest of the world.
Bank of Nova Scotia
One-year total returns: 9.7 per cent
Bank of Nova Scotia has its eyes on developing markets, with a particular focus on Chile, Colombia, Mexico and Peru – making Scotiabank an ideal stock for gaining exposure to faster growing economies with younger demographics.
The problem: Developing markets haven't been living up to potential, acting as a drag on Scotiabank's share price.
Royal Bank of Canada
One-year total returns: 13.1 per cent
Royal Bank of Canada is the diversified behemoth that has shown a tremendous appetite for expanding beyond retail banking. In January, it announced a $5.4-billion (U.S.) deal for City National Corp., ramping up its exposure to U.S. private and commercial banking.
Bank of Montreal
One-year total returns: 10.5 per cent
Bank of Montreal has staked a big claim on wealth management, developing its own successful line of exchange traded funds and buying Britain-based F&C Asset Management in 2014 for $1.2-billion.
Canadian Imperial Bank of Commerce
One-year total returns: 7.5 per cent
Among its peers, Canadian Imperial Bank of Commerce has the biggest exposure to the Canadian retail market but has stated that it wants to expand into the United States with the purchase of a wealth management firm. Approach this stock as a turnaround story: The shares have lagged their peers.
*Total returns are to the end of February 2015