Which Big Bank Belongs in Your Portfolio?

Value, credit risk, and profitability are key indicators for market-beating results.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Will Scotia Bank Outperform in a Declining Market?

Identifying large, established companies with little debt, high return on equity, a track record of earnings growth with limited volatility, and an attractive price-to-earnings ratio is an excellent place to start when compiling a list of stocks that should perform well in a declining market.

However, this type of top-down evaluation, or “screen”, is just the beginning. Investors should also complete a more comprehensive, bottom-up assessment to find the quality stocks that will deliver market-beating returns over the long term.

In this article, we take a closer look at Scotia Bank (TSX:BNS)(NYSE:BNS), one of two Canadian banks that passed the above criteria employed to identify 10 quality stocks to beat a declining market. We compare Scotia Bank with the other Canadian “big 5” banks using metrics to assess value, credit risk and profitability. Our goal is to determine whether Scotia Bank is the best candidate of the big 5 to perform well in a declining market, and deliver market-beating returns over the next three to five years.

Let’s begin by understanding the value proposition offered by the broader Canadian banking sector.

As most Canadian investors are agonizingly aware, the S&P/TSX Index (TSX:OSPTX) rose just under 10% in 2013, significantly underperforming the 30% increase in the S&P 500 index.

The five largest Canadian banks performed reasonably well in 2013. The Toronto-Dominion Bank (TSX:TD)(NYSE:TD) performed the best with a 20% gain for the year, followed by the Royal Bank of Canada (TSX:RY)(NYSE:RY) at 18% with Scotia Bank and Bank of Montreal (TSX:BMO)(NYSE:BMO) both increasing by 16%. The Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) delivered the weakest performance of the group, offering shareholders a 13% return on their investment in 2013.

As a group, however, there is still much value to be found in the Canadian banking sector. The average P/E ratio for Canada’s big 5 banks is just 12.15, which compares very favorably to the broader S&P/TSX index, which ended 2013 at a much more expensive P/E ratio of 16.20.

Value
Every investor likes quality stocks at attractive prices. To determine which Canadian bank’s stock offers the best value, we compare price-to-earnings and price-to-book ratios.

Scotia Bank’s forward P/E ratio is 10.76. While attractive relative to the broader market, it is on par with the average of 10.49 for the big 5. The lowest P/E ratio belongs to CIBC at 8.80, the smallest of the group with a market capitalization of around $36 billion.

Finally, Scotia Bank has the second best price-to-book ratio of the group at 1.89. The most attractive stock in terms of P/B ratio is the Bank of Montreal at 1.66.

Credit Risk
Bloomberg’s 2013 World’s Strongest Banks analysis reinforces what the Bank of Canada has been telling Canadians almost daily since the 2007/2008 global financial crisis — we have one of the world’s strongest banking sectors.

Four of Canada’s five largest banks made the list. Scotia Bank ranked seventh in the world. Which Canadian bank placed highest? That honor goes to CIBC, the world’s third strongest bank behind only OCBC Bank and Qatar National.

Profitability
Many invest in bank stocks due to their strong, steady and reliable dividend income — all made possible, of course, by exceptional profitability.

Scotia Bank enjoys the strongest profit margin of the group at 32%, just ahead of CIBC at 29%. In general, all five of Canada’s largest banks enjoy healthy profit margins, averaging just over 28%.

A second measure of profitability is return on equity. Scotia Bank’s return on equity is just over 15%, in line with the group’s average. CIBC, once again distinguishes itself, by delivering the strongest return on equity at an impressive 19%.

Foolish bottom line
Scotia Bank is an excellent choice for investors seeking a large company with solid fundamentals that should perform well in a declining market. And with Scotia Bank having lost nearly 4% of its value this year, primarily due to concerns regarding exposure to developing economies, now may be a good entry point for investors.

However, CIBC may offer the largest upside potential for investor striving for market-beating results over the long term. The bank performed best against our criteria of valuation, profitability and credit risk, and would be an excellent addition to a well-diversified portfolio.

 

Should you invest $1,000 in Brookfield Asset Management right now?

Before you buy stock in Brookfield Asset Management, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Brookfield Asset Management wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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.

Fool contributor Justin K. Lacey has no positions in any of the stocks mentioned in this article.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

A shopper makes purchases from an online store.
Tech Stocks

Buy the Dip on the Return of Recession Stocks?

If a recession comes back, there are some stocks that could fair well afterwards. And this is one of the…

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Retirement

Here’s the Average Canadian TFSA and RRSP at Age 60

Many Canadian retirees have tens of thousands invested in ETFs like the iShares S&P/TSX 60 Index Fund (TSX:XIU).

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

dividend growth for passive income
Investing

5 Canadian Growth Stocks to Buy and Hold for the Next 15 Years

These Canadian stocks have tremendous long-term growth potential, making them five of the best investments you can buy and hold…

Read more »

Man holds Canadian dollars in differing amounts
Stocks for Beginners

Cash Is King? Think Again During Today’s Market Dip

Sure, cash is great, but during a market dip investors may want to consider using some of the cash to…

Read more »

grow money, wealth build
Stocks for Beginners

How I’d Build a $15,000 Portfolio for Income and Growth With Canadian Value Stocks

Looking for some Canadian value stocks to buy without breaking the bank? Here's a trio to consider buying this month.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Investing

3 Canadian Value Stocks I’d Hold in My TFSA Through Market Volatility

Given their healthy growth prospects and discounted stock prices, these three value stocks would be ideal additions to your TFSA.

Read more »