The Safe Haven of Canadian Banks
Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In times of financial uncertainty, it's best to look for safe, proven companies. Companies like the Canadian Big Five Banks. Collectively, Canada has the soundest banks in the world and have higher market implied ratings than any other country according to a recent Moody's report. Moody's recommends the banks to it's customers and has given all of the big five a credit rating of AA or higher (along with a AAA rating on the Government of Canada).
All of the Canadian Big Five have shown strong and growing results in the past few quarters and boast great (and growing) dividends. The Bank of Nova Scotia (NYSE: BNS) has a dividend of 4%, averaging growth of 8% for the past 5 years (including the recession). Royal Bank of Canada (NYSE: RY) yields 4.02%, Toronto Dominion Bank (NYSE: TD) with 3.45% [TD Ameritrade], and Canadian Imperial Bank of Commerce (NYSE: CM) with 4.8%.
Royal Bank of Canada is the country's biggest bank (in assets) followed by Toronto Dominion (including it's international operations), Scotiabank, Bank of Montreal and CIBC.
The Canadian Banks have another advantage. The immigration levels in Canada are very high relative to the rest of the world and provide a growing customer base for the Big Banks.
On average, the banks have outperformed the S & P/TSX composite index by 5% per year in the past 16 years. None of the Banks trade higher than a 13 P/E multiple with CIBC being the lowest with a P/E of 10 (and a dividend of 4.8%).
Perhaps the most important plus for the Canadian banks however, is the low competition among banks in Canada. Like telecom companies, in Canada, the banking industry is almost completely dominated by a few big players. Because of government regulation, these banks can easily maintain their grip over a portion of the market. While little competition isn't good for the consumer, it's a great asset for a company to invest in.
While the Canadian banking system is arguably the safest banking investment out there there's always a possibility regulations could change and the Big Five could lose their competitive edge.
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