MENU

Are There Opportunities in the Canadian Banking Industry Outside the Big 6?

The Canadian banking industry is top heavy with the Big Six controlling over 90% of the industry. In addition, the government has large barriers to entry in place, which further strengthens these companies’ positions as industry leaders and helps secure future returns.

Although 90% of the industry is garnering all of the attention, are there hidden gems lying in the other 10%? Laurentian Bank of Canada (TSX:LB) and Canadian Western Bank (TSX:CWB) are among this 10%; they have quietly performed very well. Do they belong in your portfolio?

Here’s a look at both companies.

Laurentian

Laurentian is currently the ninth-largest bank in Canada with over $40 billion in assets. The company has closed some of its underperforming locations in an effort to cut costs and push its mobile and online offerings. Therefore, the company should be able to continue to strengthen its cash flow while keeping up with the technological shift in the industry.

From a valuation perspective, the company holds a price-to-earnings ratio of 13, which is below five of the six big banks. Therefore, investors aren’t overpaying for a juicy dividend yield of 4.14%. In addition, the company boosts a beta of 0.58, meaning if a market correction occurs in the near future, investors can still receive a generous payout without much damage to the stock price.

Canadian Western

Canadian Western is the 10th largest bank in Canada with over $25 billion in assets. The company offers many of the same services as the larger banks; however, over 71% of its revenue is derived solely from British Columbia and Alberta. Therefore, the company doesn’t have the international reach that the larger players have in the industry.

As for investor returns, the company has been able to grow its dividend by an average of 13% annually since 2011. Combined with a payout ratio below 45%, the company should be able to sustain and grow its current dividend yield of 3.2% and provide steady returns for investors.

Foolish bottom line

Although these are solid companies, their opportunity for growth is limited. In order for the banks to expand their current operations, they need to either steal market share from competitors or open locations in international markets. Since neither of these companies can do this on the same level as the Big Six, the growth potential for both companies is somewhat capped.

I’d recommend sticking with the larger players in the industry. With only six banks controlling 90% of the market, you’re better off investing in banks that have more international exposure and a larger capacity to grow.

1 Massive Dividend Stock to Buy Today (7.8% Yield!) - The Dividend Giveaway

The Motley Fool Canada's top dividend expert and lead adviser of Dividend Investor Canada, Bryan White, recently released a premium "buy report" on a dividend giant he thinks everyone should own. Not only that - but he's created a must-have, exclusive report that outlines all the alarming traits of dividend stocks that are about to blow up - and how you can avoid them.

For this limited time only, we're not only taking 57% off Dividend Investor Canada, but we're offering you special access to two brand-new reports, free of charge upon signing up. They will outline everything you need to know so you steer clear of dividend burn-outs AND take advantage of the dividend giants in the Canadian market.

While this offer is still available, you can find out how to get a copy of these brand-new reports by simply clicking here.

Fool contributor Colin Beck has no position in any stocks mentioned.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.