AUS
NZ
UK
CA
USA
IND
Canada's financial landscape is dominated by the Big Six banks, collectively holding a staggering 90% of the nation's deposits. Their massive deposit base not only affords them relatively low funding costs but also positions them as Domestic Systemically Important Banks (D-SIBs). Mandated by the Office of the Superintendent of Financial Institutions (OSFI) to maintain a capital buffer of 3.50% of total risk-weighted assets by November 1, 2023, these banks ensure adaptability to key vulnerabilities and system-wide risks.
The Canadian Bankers Association, in a May 2023 statement, highlighted the global recognition of Canadian banks for their strength, resiliency, prudent lending practices, large and diverse deposit bases, and diligent government oversight. With over 99% of working-age Canadians holding accounts at financial institutions, surpassing the 91% rate in the United States, these banks play a pivotal role in the financial ecosystem.
Profits Speak Louder Than Words
These financial behemoths stand as some of the most profitable businesses in Canada. In the past twelve months alone, the Big Six Canadian banks collectively boasted a staggering net income of $52.5 billion. Leading the pack, Royal Bank of Canada (TSX:RY) and Toronto-Dominion Bank (TSX:TD) reported net incomes exceeding $14.5 billion each.
Unveiling Investment Opportunities
For investors seeking exposure to the Big Six Canadian banks in a relatively balanced manner, the BMO Equal Weight Banks Index ETF (TSX:ZEB) provides a compelling option. This exchange-traded fund (ETF) distributes its weight evenly, with each big bank comprising approximately 16-17% of the portfolio. With a current distribution yield of around 5%, paid out as monthly cash distributions, it serves as an avenue for consistent returns. However, investors should be mindful of the management expense ratio, standing at 0.28%, impacting annual returns.
Over the past decade, the ZEB ETF has demonstrated its potential, delivering annualized returns of nearly 9%, surpassing the Canadian stock market's return of just over 8%. Additionally, ZEB's cash-distribution yield exceeds the Canadian stock market yield, providing an enticing investment proposition.
Navigating Individual Bank Stocks
While the banks have experienced a sideways range since their peak in 2022, both RBC and TSX TD stocks have outperformed the ZEB over the past 10 years. With annualized returns of approximately 10.4% and 10.2%, respectively, they showcase resilience and sustained growth.
Royal Bank of Canada stock, currently priced at $120.19 per share, offers a slight discount of 11.5%, according to the 12-month analyst consensus price target. With a dividend yield of around 4.5%, it presents an attractive opportunity. Similarly, TD stock, trading at $81.76 per share, is believed to trade at a discount of 10.7%, providing a slightly higher dividend yield of 4.7%.
The Path Forward
In a long-term diversified stock portfolio, allocating a portion, perhaps around 10%, to big Canadian bank stocks is a prudent strategy. Capitalizing on favorable valuations allows investors to accumulate safe and growing dividend income over time, shielding them from the cyclical nature of the economy. Unlike gold, these bank stocks not only hold intrinsic value but also generate a steady income stream, making them a robust addition to any investment portfolio.
