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Oct 3, 2016

Laughing All The Way To The Banks Canada's Big Five Have Been Superb Investments And They Still Look Strong

by Richard Morrison

Richard MorrisonFor long-term buy-and-hold investors, nothing really beats a portfolio of Canada’s five largest banks. Through thick and thin, Canada’s Big Five banks have consistently returned record profits, surpassing analysts’ earnings estimates and steadily increasing dividends paid out to shareholders.

Threats from FinTech upstarts that allow users to do their banking from their phones have the banks scrambling to embrace new technology, but adapt they will.

Although the banks are replacing employees with computer software, the Big Five banks still collectively employ more than 300,000 people, almost none of whom are affiliated with any union. The vulnerability of banks’ rank-and-file employees can leave front-line workers grumbling but it’s a plus for investors. Canadian banks would not be reporting record profits and raising dividends every quarter if their employees, like many unionized public servants, had high salaries and generous benefits together with such public-sector perks as banked sick days and gold-plated pensions.

As the accompanying table shows, Canadian banks have been superb investments over the past 20 years. The banks regularly increase their dividend payout and when these ever-growing dividends are reinvested, growth accelerates, turning a small initial investment into a big one over the long run. The table shows the Royal Bank has been the best long-run performer among the Big Five, but it makes sense to own all five. (Disclosure: My wife and I have held stakes in all five banks for more than 20 years, subscribing to each bank’s dividend reinvestment plan.)

You can invest equal dollar amounts in each bank, buy them gradually, or buy more of whichever bank has performed the worst within your own portfolio. Depending on when you’ve bought, your laggard may be any of the five, and eventually, the laggard tends to catch up with the rest of the group. Those with smaller amounts to invest can buy units in ETFs that hold the banks.

The first two months of 2016 were dismal for Canadian stock markets, and that’s when common shares of all Big Five banks were at their cheapest. Aside from minor dips in June and August, all five are up so far this year.

The latest upward nudge in the banks’ shares makes them appear overvalued, particularly in the face of such worries as a slumping economy, credit losses from the oilpatch, and overvalued houses in Vancouver and Toronto.

Remember, however, that these concerns have been raised by economists, financial analysts and newspaper reporters whose employers require them to constantly generate new material, and so for them any worry is better than a blank page. Counselling readers to buy and hold the banks and ignore short-term worries makes it difficult to find something new to say the next day. There is, after all, no investment publication called Buy-And-Hold Monthly.

A potential house price collapse in Vancouver and Toronto, for example, is frequently cited as a looming crisis for banks. Sure, only wealthy Canadians can afford houses in Vancouver or Toronto, but demand for homes in these cities does not come only from Canada. House prices will remain strong as long as middle- and upper-class foreigners perceive Canada as a peaceful, prosperous, stable nation that welcomes newcomers.

FinTech, or financial technology companies, represent a far more worrisome threat to Canada’s Big Five. These are small, nimble companies that can be started quickly by a few tech-savvy people in a rented office. FinTech firms let users do their banking with their smartphones, bypassing many of the fee-generating services that banks provide. While most FinTech firms are small, at the other end of the size spectrum, Apple’s Apple Pay is winning away bank customers, while Google has registered as a mortgage broker in some U.S. states. The banks are responding to the FinTech threat by cutting fees and offering more online services, and no doubt we’ll soon discover that many FinTech names have been bought by the banks themselves.

Bank Of Montreal

BMO shares started the year at about $70 and have moved steadily higher. The price crossed the $80 level in mid-April and has kept on rising. At a recent close of $86.79, the common shares trade at 12.9 times earnings, while the dividend yields 4%.

For the third quarter ended July 31, BMO’s adjusted net income was $1.295 billion, up 5% from the same quarter a year ago, while adjusted per-share earnings rose to $1.94 per share, up 4%. The bank’s adjusted return on equity (ROE) slipped to 13.5% vs. 14%, while its provision for credit losses increased to $257-million from $160-million.

BMO kept its quarterly dividend at 86 cents or $3.44 per year, but over the past five years the dividend has been hiked eight times, and the payout is 23% higher than it was in 2011.

Royal Bank

Royal Bank shares have not performed as well as BMO’s this year, but are still up about 8%. At a recent close of $81.30, the common shares trade at 12.2 times earnings, while the dividend yields 4.1%.

For the fiscal third quarter, Royal reported record net income of $2.9 billion, up $420 million or 17% from a year ago, and up $322 million or 13% from the previous quarter, helped by after-tax gains of $235 million on the sale of its home and auto insurance to Aviva Canada.

Royal Bank’s return on common equity slipped to 18.0%, down from 18.1%. The bank bought back $292 million worth of its own shares in the third quarter. Royal increased its quarterly dividend by 2 cents to 83 cents per share ($3.32 per year), the tenth dividend increase over the past five years. The payout is a full 54% higher than it was in 2011.

Bank of Nova Scotia

Scotiabank’s common shares started the first two months of 2016 in a major slump, struggling to cross the $55 level, but have since enjoyed a major turnaround, racking up a gain of more than 20% since the beginning of the year. At a current price of about $70, BNS common shares trade at 12.5 times earnings, with a dividend yield of 4.1%.

Scotiabank reported fiscal third-quarter net income of $1.96 billion compared to $1.85 billion in the same period last year. Diluted earnings per share were $1.54, compared to $1.45 in the same period a year ago. Return on equity was 14.8% compared to 14.7% last year.

Like Royal, BNS increased its dividend by 2 cents and like Royal, it was the tenth dividend hike in the past five years. Scotiabank investors now enjoy a dividend of 74 cents every quarter, 42% more than the quarterly payout in 2011.

TD Bank

TD’s share price dipped below $50 for a few days in January and February but since then the stock has climbed to about $58.50, up 5% on the year. The stock trades at 13.3 times earnings, while the $2.20 annual dividend yields 3.8%.

For the fiscal third quarter of 2016, TD reported net income of $2.36 billion, up from $2.27 billion for the same quarter a year ago. Reported diluted earnings were $1.24 per share, up from $1.19 in the third quarter of 2015. The bank reported its adjusted return on average common equity as 14.5%.

TD kept its dividend at 55 cents per quarter ($2.20 annually). Over the past five years, TD has increased its dividend eight times, and the payout is now fully 56% more generous than it was five years ago.


At $104, CIBC shares are up 12% on the year and now trade at 11.4 times earnings, while the annual dividend of $4.84 yields about 4.7%.

CIBC reported net income of $1.44 billion for its fiscal third quarter, up handily over the $878 million reported for the same quarter a year ago. When adjusted for one-time gains, the net income was $1.07 billion, compared with $990 million for the same quarter of fiscal 2015.

CIBC’s adjusted return on common equity was 19.8%.

CIBC’s quarterly dividend of $1.21 had been raised by three cents earlier this year—the eleventh time the bank’s board raised the dividend in the past five years. Dividends have grown by 34% since then.

Bank ETFs

For income-seeking investors who don’t want to buy the banks individually, the Bank of Montreal’s Equal Weight Banks Index ETF (ZEB/TSX) is a good choice. The $864 million fund, launched in October, 2009, carries a management expense ratio of 0.62% and, as its name implies, consists of equal weights of each of the Big Five banks, plus National Bank of Canada (NA/TSX).

The fund’s monthly payout of 7.2 cents per unit yields about 3.6%.

The larger $1.16 billion BMO Covered Call Canadian Banks ETF (ZWB/TSX) generates premium income by writing out-of-the-money covered call options against the banks. ZWB, which carries a 0.72% MER, provides a monthly 5.4% dividend income with some downside protection, but its holders miss out on capital gains. So far, it has been a poor choice when compared with ZEB.


Many CMS subscribers already have stakes in at least one of the Big Five Canadian banks. If you make a point of holding them all, and enlarge your stake by subscribing to each bank’s dividend reinvestment plan, the steady dividend growth will work miracles over the long run.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.


Big Five Banks from



Earliest Date Found

Annualized Return

Value of $1,000

Royal Bank





Bank of Nova Scotia





TD Bank





Bank of Montreal