The Canadian Banks – So Hot Right Now

Canadian bank stocks are rolling. Should you pile in?

| More on:

The S&P/TSX Composite Index managed to eke out a gain over the course of Wednesday morning thanks in large part to the Financials sector.  More specifically, the Canadian banks.  Royal Bank (TSX:RY) and Scotiabank (TSX:BNS) were the two largest positive contributors to the Index’s return through the morning.

This performance continues a strong run for all the Canadian banks as illustrated in the table below.  While the S&P/TSX Composite is pressing up against its 52 week high, so too are the banks.  In addition, the 6 month returns for the group have, for the most part, dominated the broad index.

Company Current 52 wk high % of high 6 mth rtn Div yield
Royal Bank (TSX:RY)












Scotia (TSX:BNS)
























S&P TSX Composite






Source:  Capital IQ

The banks may continue to roll for a number of fundamental reasons:

  • Bond yields are creeping higher.
  • Foreign divisions offer potential earnings growth.
  • Improving investor sentiment may drive wealth management and capital markets divisions.
  • Loan losses remain benign.

Another reason for this market beating performance to continue, at least for the next couple of weeks, is that it is RRSP season here in Canada.  For the reasons provided above, plus the banks continue to offer superior dividends that feed the dominant income theme, is there an easier sell in the market right now for a broker to make to their client?

Whoa there buckaroo!

Something to consider before rushing on to the bank bandwagon is valuation.  Based on a quick and dirty relative comparison in the table below of current book value multiples to the average over the past 10 years, banks could be considered very close to fully valued.  This doesn’t mean that the run needs to stop, but it could indicate that there isn’t much near term upside left.

Company P/B 10 yr avg % of avg
Royal Bank 2.3



CIBC 2.2



TD 1.7



Scotia 2.0



BMO 1.6



Average 1.9



Source:  Capital IQ

The Foolish Bottom Line

The Canadian banks are some of the greatest businesses in the world and have made investors in this country piles of money over the years.  Historically, it has been nearly impossible to lose money on this group if you simply held on over the long-term.  This being said, banking is cyclical and these companies do occasionally slip up.

A potential hiccup looms as Canadians have accumulated sizeable personal debt and our housing market has been on a steadily appreciating tear.  Both of these dynamics have helped provide a significant tailwind for the banks over the past decade.  Should either take a turn, growing the domestic business is going be a challenge.  With valuations as full as they are, a turn could lead to a pull-back for the stocks.  Rather than rushing in, this pull-back may offer investors a much more appealing opportunity to fill up their portfolio with these financial giants.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

edit Safety First illustration
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

These three dividend stocks are all high-quality companies with defensive operations, making them some of the safest investments in Canada.

Read more »

data analyze research
Bank Stocks

Better Buy: Royal Bank Stock or Bank of Nova Scotia?

Bank stocks appear cheap after the latest plunge. Is Royal Bank or Bank of Nova Scotia a buy today?

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

3 Stocks to Anchor Your Portfolio in a Rocky Market

Three stocks are solid anchors in any portfolio today for their outperformance in a weak market and defiance of the…

Read more »

Metals and Mining Stocks

Better Metals Buy: Gold Stocks vs. Lithium Stocks

Gold is the evergreen choice as a hedge against inflation and weak markets. In contrast, battery metals may offer unique…

Read more »

Man making notes on graphs and charts
Bank Stocks

TD Bank Stock: A TSX Top Pick Amid U.S. Banking Rout?

TD Bank (TSX:TD) stock could prove a worthy bet for brave investors who aren't fearful over the recent wave of…

Read more »

edit Sale sign, value, discount
Tech Stocks

2 Cheap Tech Stocks to Buy Right Now

Many tech stocks offer exceptional returns compared to other stock sectors when the market is bullish. You can add to…

Read more »

money cash dividends
Dividend Stocks

3 Solid Dividend Stocks That Cost Less Than $30

Given their solid financials and healthy cash flows, the following under-$30 dividend stocks are a good buy in this volatile…

Read more »


Is Now the Right Time to Buy Fortis Stock?

Fortis stock looks cheap today. Should you buy now or wait?

Read more »