Sector Analysis: Canadian Banks

If you’re anything like me, you probably get a warm, fuzzy feeling whenever you think about the Canadian bank stocks in your portfolio.

Canada’s six largest banks (and EQB, can’t forget about Equitable) have made countless investors rich, and they’ve been doing it for decades. No, wait, that’s not right.

It’s centuries, actually.

Bank of Montreal has been around for more than 200 years, and will have paid dividends for 200 consecutive years in 2029. Scotiabank has been around since 1833. The others can all trace their history back to the 1800s, too.

Despite the sector delivering massively good long-term results, naysayers say Canada’s banks are on shaky ground. They point to things like stretched consumer balance sheets (Canadians are more in debt than ever), and housing bubbles in Toronto and Vancouver to make their point.

Bank balance sheets also the equivalent of black boxes. Nobody except a bank’s management team really knows what’s inside of them. An optimist is fine with that — Canadian bankers have a well-deserved reputation of prudence — but a pessimist will look at that and assume the worst.

Bears also remember when U.S. banks almost caused a global financial meltdown in 2008-09. Many of them went to zero, and even the strong ones needed a bailout. They contend that such an event could easily happen in Canada, even though our financial system has various protections in place.

Today let’s take a closer look at the sector and see just exactly what makes it special. I’ll also analyze each bank individually.

We have a lot to cover, so I’d better get started.

Banks have a reputation of not being very good businesses in general. Bears point to things like the unknown balance sheet risk, the massive amounts of leverage needed to make a return, and crummy return on asset numbers.

Basically, banks have fallen out of favour in a world that increasingly values tech-heavy companies with intangible assets and rapid growth at any cost.

Although Canada’s banks do suffer from some of those issues, they have various advantages that banks in other countries don’t enjoy. I believe these advantages combine to create a solid moat.

Let’s start with just how dominant the banks are in Canada. Canada’s six largest banks control approximately 90% of the country’s banking assets. It’s a true oligarchy.

The beauty of this position is nobody really has to take any excessive risk. They can sit back, relax, do something slightly different than competitors, and still enjoy a nice piece of a massive market. The market keeps getting bigger as the Canadian economy expands, too.

Upstarts will inevitably try to attack this dominant position. A successful challenge will yield a big prize, but it won’t be easy. Most challengers will fail. A small percentage will succeed, which then offers the incumbents a choice. They can:

One example is the 100% online banking experience created by ING Direct. It was created in the mid-2000s by Dutch financial services group ING. Interest rates were strong, and the branchless network created cost savings that translated into no account fees.

Scotiabank thought the model was interesting, and it acquired ING Direct in 2012. It was no longer allowed to use the ING name, so it was rebranded into Tangerine in 2014.

Other Canadian banks saw the future and simply built their own online-focused banking systems. A little over a decade later the job is done, and none of us go into the branch any longer. This has allowed banks to slowly close branches, which improves profitability.

The other banks simply copied the idea once it was proven.

In a country with a more fragmented banking system — like the United States — banks will sometimes take risks to gain market share. Such risks generally work out pretty well in bull markets, but have a funny way of going sideways when the economy stumbles.

The second thing that really helps Canadian banking is a strong publicly-backed mortgage insurer. Canada Mortgage and Housing Corporation (CMHC) is a federal government-owned company that takes significant risk off bank balance sheets by insuring the riskiest loans.

Anybody with less than 20% down is forced to pay a mortgage insurance premium of anywhere between 1-5% of the value of the property, depending on the risk. Meanwhile, CMHC does what any insurance company does and invests the proceeds. It works; CHMC’s historical default rate is quite low, meaning it makes an overall profit while making the bank whole on the occasional default.

CMHC is a massive advantage for Canadian banks that doesn’t get talked about enough. It’s also a boon to the Canadian public, too. Mortgage rates in Canada are competitive partially because banks can offload some of the risk to CMHC.

Finally, Canadian regulators help bankers stay conservative. Regulators realize that concentration comes with certain risks, and the last thing the country needs is unstable banks that might fail at the first sign of crisis.

In the banking world, caution is a good thing.

Put it all together, and it translates into much better financial results. Most bank analysts use return on equity (ROE) as a measure of bank profitability, which works well in Canada because regulators limit the amount of debt a bank can carry. All six Canadian banks have fairly similar debt levels.

Canadian banking generates much higher ROEs than banking in most every other country. On average, the big six generates approximately a 20% average ROE from their Canadian division, with both TD and Royal Bank pushing closer to 30%. These are terrific numbers.

These excess profits can either be reinvested inside of Canada (the ideal solution, really), put to work in another country, used to return capital to shareholders in the form of dividends/buybacks, or to shore up the balance sheet. Each bank will take a slightly different path here, but the point is that excess profits are a good thing. Unless management screws up this windfall, it’ll result in better returns.

Next, let’s take a look at each Canadian bank in more detail, and then follow it up with a look at the entire sector’s valuation.

Let’s quickly go over each of the banks, taking a surface level look at the business and how they differ from each other. I’ll list them in order from my least favourite to favourite.

Bank of Nova Scotia (TSX:BNS) is Canada’s most international bank. It has operations throughout Latin America and into the Caribbean. Its largest LATAM exposure is in Mexico, Peru, and Chile, and the bank has sold assets in underperforming markets like Colombia, Panama, and Costa Rica — although it wasn’t able to completely exit these markets. Instead it got a 20% ownership stake in Banco Davivienda.

More than 50% of the company’s operating earnings came from outside of Canada in Q1.

I’ll give Scotiabank credit for punting its worst foreign assets. Results from Colombia, Panama, and Costa Rica would regularly drag down overall earnings. But it then took a big position in KeyCorp (NYSE:KEY), spending US$2.8B for a 14.99% stake in the U.S. bank in 2024. That worked out to $17.77 per share.

Shares currently trade hands at $21.04 on the NYSE. Scotia has made some money on this deal — remember, it also collects dividends — but it hasn’t been the best move. KeyCorp has underperformed many of its peers.

Scotia’s lackluster recent acquisition history, plus general investor disinterest in LATAM markets and its worse than average Canadian results combine into a not-so-great combination. It’s my least favourite Canadian bank.

Bank of Montreal (TSX:BMO) is Canada’s oldest bank. It was also the first Canadian bank to enter the U.S. market in a big way with its 1984 acquisition of Chicago-based Harris Bank. It then expanded that presence in 2023, acquiring Bank of the West from BNP Paribas for US$16.3B.

BMO has become the Canadian bank most concentrated in the U.S. 42% of all revenue comes from its U.S. operations, versus 52% coming from Canada.

BMO does have some clout in what has traditionally been a fragmented U.S. banking market. It is a top-10 U.S. commercial lender and a top-15 retail bank in the U.S. Its capital markets division has also made inroads in the United States. That part of the business accounts for about 25% of total U.S. revenues.

The problem is the U.S. business is struggling. It generated a ROE of just 6.7% in 2024 and 8.3% in 2025. The number is improving and the bank has a goal of reaching 12% ROE in 2028, but I’m a little skeptical. The bottom line is U.S. banking just doesn’t deliver the same kinds of returns that Canadian banking does, and an awful lot of BMO assets are invested in the U.S.

The good news here is the Canadian side of the business continues to chug along, consistently delivering ROEs of above 20%. It also continues growing the wealth management business on both sides of the border, which is another high ROE business.

The first two rankings in this list were fairly easy. Both BMO and BNS have real problems. It gets a little tricky after that.

Let’s start with CIBC (TSX:CM). For years CIBC was mentioned alongside Scotia as the dog of the group. CIBC had the least amount of foreign diversification, and its Canadian operations struggled at the same time. Not a great combination, and the market reflected that. The stock surpassed a 7% yield in the latter part of 2023.

These days shares yield less than 3% as the stock has more than doubled off those lows. As far as I can tell, that’s the company’s lowest yield in the last ~20 years.

CIBC has done a wonderful job of turning things around. Revenue growth reached 15% in its most recent quarter, buoyed from strength in pretty much every part of the business. Its wealth management business in the U.S. is doing well and adding to overall ROE. Both Canadian personal and Canadian commercial banking revenues were 13% higher. It’s growing while still improving overall ROE.

And if that’s not enough, the company is hammering the share buyback. It has repurchased about $1B worth of shares.

It has all translated into impressive earnings growth. CIBC earned $6.72 per share in 2023. In 2026, earnings are expected to surpass $10 per share for the first time ever. Growth is expected to continue, with analysts predicting the bottom line will surpass $11 per share in 2027.

Quiz time!

Which Canadian bank has posted the highest total return over the last 20 years, assuming all dividends were reinvested?

The answer is National Bank of Canada (TSX:NA). It has delivered a CAGR of nearly 15% since 2006. That’s enough to turn a $10,000 initial investment into something worth more than $153,000.

National Bank is by far the smallest of the six largest Canadian banks, which gives it more growth opportunities. It has also been an aggressive purchaser of late. It recently completed its acquisition of Canadian Western Bank — a move that immediately gave it a branch network in Western Canada — and is in the process of acquiring perennial underperformer Laurentian Bank (TSX:LB).

Good, this analyst says. Somebody has to put that dog out of its misery.

There’s a very simple reason why National Bank has been able to surpass its peers in total return. It is still small enough that it can expand inside of Canada and move the needle, rather than needing to look at other countries for opportunities. This allows it to consistently post ROEs higher than peers. Higher growth + higher returns on equity = satisfied investors.

National also has investments outside of Canada, including ownership of a bank in Cambodia. But these are just a small part of the business, with the majority of the company still invested in the sweet spot that is Canadian banking.

TD Bank (TSX:TD) spent some time in the doghouse in 2023 and 2024 as the company made some mistakes in the U.S.

That last sentence may be a contender for understatement of the year. TD was caught in the middle of a massive money laundering scandal, and U.S. regulators threw the book at them. Fines ended up surpassing US$3B, and the company isn’t allowed to expand its U.S. business until regulators give it the a-ok.

Bears said this would keep the stock down for years. Instead, the opposite happened. TD shares rallied sharply, and have now increased by more than 100% in a little less than 18 months. Not bad at all.

New CEO Raymond Chun is focusing on the Canadian business, taking out excess profits from the U.S. and moving them to Canada. TD’s Canadian business was the best among its peers for years, and it plans to retake that top position with this new focus on Canada. Right now I’d put that Canadian business just a little below the final bank on this list, but if anyone is going to dethrone the champion, I’d vote for TD.

Royal Bank (TSX:RY) is the largest bank in Canada, the largest company on the TSX, and the largest position in my portfolio.

When I was building my bank portfolio — I own all six of Canada’s largest banks — my positions in each started out fairly evenly. For years Scotiabank was the leader as I was enticed by the extra large dividend yield (and low valuation) versus its peers.

I then started putting more emphasis on quality, rather than valuation. I’ve exclusively bought shares of Royal Bank, TD Bank, and National Bank since 2023 — with the exception of adding to BMO when shares very briefly touched $110 each in 2024.

I like Royal Bank the most for a few reasons. Firstly, the company dominates Canadian retail banking. After being surpassed briefly by TD in areas like mortgages in the 2010s, Royal Bank has cemented its place atop the market in a bunch of key categories.

Secondly, Royal Bank is an excellent wealth manager. It has the number one market share of high net worth and ultra-high net worth clients in the country, and it is Canada’s leader in fee-based assets per advisor. It is the 6th largest full-service wealth advisory firm in the U.S., and has quietly built a top-5 UK wealth advisory firm.

And if that’s not enough, it has quietly built up an insurance business that currently generates a hair over $800M in annual profits.

I could opine all day on how much I love Royal Bank, but I won’t. We’ve all got things to do. Instead I’ll just say that for most Canadian banks, you have to pick and choose things that they do better than average. Royal Bank does just about everything better than most. That kind of broad outperformance is exactly what I’m looking for.

Canadian banks come out with earnings the week after next. BMO, BNS, EQB, and NA get the party started on Wednesday, May 27th. CIBC, TD, and RY will join them the next day.

Here’s my preview of the dividend increases I expect in this period.

The short answer is no. I’m content to hold, but I’m not adding to my Canadian bank holdings.

I like buying most businesses when nobody wants them. I’m looking to buy the income stream for the lowest possible price, which maximizes my yield. Plus, I believe such a strategy gives me the best chance for capital gains, too.

I was buying TD in 2024 when the money laundering crisis pushed shares to a multi-year low. I nibbled on BMO shares when it missed earnings and shares tanked in 2024. I bought Royal Bank and National Bank in 2023 when both hit 52-week lows amid fears of higher interest rates causing waves of mortgage defaults.

Canadian bank shares are almost universally hitting all-time highs today. If my strategy says to get greedy when they’re sitting at lows, then it says the opposite when shares are high. It’s time to be cautious.

I have little desire to sell. Canadian banks are forever assets for me, and I don’t want to pay the tax bill. Besides, I’m a lousy market timer. Y’all can do what you want, but I’m going to take the simple approach of holding on and letting those sweet dividends fund my hopeless golf addiction.

Your author owns shares in all six large Canadian banks, plus Equitable Bank.