Big bank BONANZA

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This article was published 18/11/2023 (691 days ago), so information in it may no longer be current.

Canada’s big banks are so infused in our lives, they need no introduction.

The RBC, BMO, TD, CIBC and Scotiabank brands are so widely recognizable that the Big Five banks no longer go by their full names (i.e., Royal Bank of Canada).

Altogether, the Big Six (if you count National Bank of Canada) make up 92 per cent of all loans and 94 per cent of all deposits in the nation, according to a recent report from DBRS Morningstar. Yet a JD Power survey of bank customer satisfaction from this year found many customers feel they are getting lacklustre advice from the banks.

What’s more, the survey scores them out of 1,000 on consumer satisfaction, and the best of them, RBC, has a score of 610 — hardly an A on the report card.

“There is a bit of a love/hate relationship with the banks,” says Evan Mancer, chief investment officer with Cardinal Capital Management Inc.

On the one hand, we might complain about them, the fees we pay and, perhaps, the less than satisfactory service. On the other hand, we’re loyal customers.

“Bank customers, especially in Canada, are some of the more loyal customers in the world,” Mancer says. “It’s partly because it’s a sticky business, making people reluctant to switch.”

Yet customer ambivalence aside, Canadians may want to turn their financial frowns upside down when looking at the big banks through investors’ eyes.

“I get it: customer service can vary, and some of their processes can be cumbersome,” says do-it-yourself investors blogger Mark Seed with My Own Advisor.

Yet, the banks are very profitable investments that “should remain a core holding within a diversified portfolio.”

Indeed, as a group, “they have done historically very well,” adds Finlay McKay, portfolio manager with Value Partners Investments in Winnipeg, noting big banks have paid a growing dividend, along with share price growth, over many decades.

“There have even been long periods where Canadian banks as a group have even outperformed Berkshire Hathaway,” he says about famed investor Warren Buffett’s very successful conglomerate.

Here’s another thing about the big banks today as investments. They’re arguably on sale.

“They’re trading at valuations—price-to-earnings, price-to-book and dividend yield—very close to recession level lows,” Mancer says.

Their share prices relative to their assets (price-to-book) and their earnings (price-to-earnings) have hit deeper lows compared with the overall Canadian stock market due to recession and ensuing housing crisis fears, says Mark Yamada, president of PUR Investing Inc. in Toronto.

“We have had a pending real estate crash for how many years?” he says jokingly, noting investors worry about a U.S. market downfall that triggered the 2008/2009 financial crisis happening here.

Certainly, the big banks face headwinds, particularly with respect to mortgages, Mancer says, pointing to potentially millions of fixed rate mortgages coming due in the next two years with many borrowers renewing at much higher rates.

“The hope is that rates may be slightly lower.” Even if interest rates remain elevated, the banks “have been pretty attentive to” the risks, he adds.

What’s more, higher interest rates provide the banks with higher revenue. Consider those ultra-low interest rate paying chequing and savings accounts. These provide financial institutions with a much wider spread, lending at more than five per cent today compared with three per cent or less two years ago.

And banks are in a far better financial position than they were in 2008/2009—which posed significant risks to the big banks.

“The Canadian banks compared with the U.S. banks have a better history of navigating through tough times,” Mancer further notes.

Arguably, the big banks have already been plodding through difficulty beyond recent months.

“Banks have underperformed for five years,” Yamada notes. “The last time this happened was in 1990 when the banks underperformed for 10 years, but still paid a nice dividend.”

They also pay a nice dividend today, ranging from about 4.5 to 7 per cent, “and they’re pretty well covered dividends,” McKay says. “Historically, these banks don’t cut dividends.”

While their share prices could fall more, some are off as much as 40 per cent from their peaks in 2021 and early 2022.

“There’s good reason investors are worried about Canadian banks,” McKay says, noting higher rates inevitably slow down banks’ main business: loans.

Yet these firms are among Canada’s largest publicly traded companies. In fact, RBC and TD are the two largest stocks on the Toronto Stock Exchange by market capitalization (share price multiplied by total number of shares outstanding).

As economic conditions improve, the expectation is their share prices will too.

Of course, one question for investors is: Which big bank to buy?

Why not own them all in one fell swoop with an exchange-traded fund, like the BMO Equal Weight Banks Index ETF — which only holds the Big Six, Seed suggests.

That said, if you own a Canadian equity mutual fund, you likely already have exposure.

Although Canadians may feel ambivalence about the big banks, they are likely to remain the nation’s top economic engineers for years to come. In turn, no matter the choice, buying their shares today is likely to lead to long-term, happy investment outcomes.

“The banks are on sale now, which doesn’t mean there can’t be an even better sale six months from now,” Mancer says.

“Yet, generally, if you have a long time horizon, buying them on sale at any point is a good thing.”