How Canaccord Genuity Rates Canada’s Top Banks

Which three banks does Canaccord say you should buy, and should you listen?

| More on:
The Motley Fool

One of Canada’s lesser known financial institutions, Canaccord Genuity has just initiated coverage on Canada’s top six banks. Three of them — Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), CIBC (TSX:CM)(NYSE:CM), and Royal Bank (TSX:RY)(NYSE:RY) were rated “buy”. The other three were rated “hold”. As could be expected, none were rated “sell”. So what makes the first three choices so much better than the second three?

Bank of Nova Scotia: High growth prospects, battered share price

There is a very compelling case for buying Bank of Nova Scotia shares. Canada’s most international bank has a strong presence in emerging markets, especially in Latin America. New CEO Brian Porter has recently indicated that he will focus international banking on four countries in particular: Mexico, Colombia, Peru, and Chile. These countries are not only performing very well, but also have significantly underbanked populations, giving Bank of Nova Scotia an excellent opportunity to grow earnings.

Due to a recent sell-off in emerging markets stocks, Bank of Nova Scotia shares have not performed particularly well. In fact, they have performed worse than any other bank in the top six. This may have given value-focused investors an opportunity.

CIBC: Cheap, but struggling for growth

Ever since the financial crisis, CIBC has done an excellent job getting back to the basics: plain old Canadian banking. This of course has made CIBC especially profitable and stable relative to its peers.

There are drawbacks to CIBC’s strategy. One is that growth is hard to come by. The other is that the bank may be overexposed to Canada’s real estate market. As a result, CIBC’s shares trade at just 10.3 times earnings. Only National Bank trades at a lower multiple.

Royal Bank: One of the world’s leading banks

Royal Bank is not only Canada’s largest bank, but Canada’s largest company. It is the world’s sixth largest wealth manager and its Capital Markets business is number 10 globally. Unlike the American and European banks, RBC survived the financial crisis relatively well. This has allowed RBC to make gains as the rest of the world’s banks retreat and repair themselves.

Any patterns?

Oddly, the three banks all have branches in the Caribbean, although this is surely a coincidence. But one thing stands out a lot more: both banks with presences in the United States (TD and Bank of Montreal) are off the buy list.

There is a strong argument for this. Even though the U.S. economy is performing a lot better, the environment south of the border is very competitive, making profits hard to come by. Both of these banks have yet to prove that great returns can be achieved in the United States. Until they do, it looks like Canaccord will not be recommending them.

There are also concerns surrounding National Bank. One is that banking is a scale business, meaning it’s an advantage to be big. There are a lot of fixed costs, such as technology and regulatory costs, that are more easily handled by the biggest banks, putting National Bank at a disadvantage. Secondly, over two-thirds of loans are in Quebec. So if anyone is looking to bet on the Quebec economy, this may be the best way. But not many people are.

Foolish bottom line

One should never rely only on sell-side analysts like those at Canaccord for making investment decisions. But their recommendations can have some interesting insights, and can be a great place to start.

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 Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

money cash dividends
Stocks for Beginners

Where to Invest $10,000 in April 2024

If you've already created a diversified portfolio and are looking for more options from a windfall, here is where I…

Read more »

data analyze research
Investing

The Ultimate TSX Stock to Buy With $1,000 Right Now

Brookfield Asset Management (TSX:BAM) is one of the best Canadian stocks to buy for those looking to put capital to…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »