According to a new report from The Globe and Mail, Canada’s banks “remain secretive in many ways”, despite progress. This is partly to be expected, since banks are notorious for being complex and difficult to see through. But in Canada, this could be a serious problem, since so many investors rely on the big 5 for dividend income.
So with that in mind, below we try to answer a simple question: Can you count on the Canadian banks?
Always too complex
Even with much better disclosure nowadays, there’s an inescapable reality: Banks will always be complex and unpredictable.
For example, it is standard practice for the banks to report their Capital Markets trading revenue by day. How many industries can you think of where daily revenue numbers are made available? But at the same time, even this level of detail still leaves many investors’ questions unanswered – questions such as, “What happens to the stock price if Canada’s housing market crashes?”
So if you can’t handle a little uncertainty, you should just avoid the banks altogether.
A look at the financial crisis
But this still leaves the all-important question unanswered: Can the Canadian banks be counted on to provide safe dividends? The answer seems to be yes. And we only need to look at the financial crisis to explain why.
The financial crisis was the worst thing to happen to banks in 70 years, causing many failures around the world. It also served as a test; if a bank could survive this crisis, it could survive anything.
Importantly, not a single Canadian bank even cut its dividend during the crisis. And since then, the banks have gotten even safer. Capital levels are higher, profits are higher, and risk controls are also more robust. So if you’re counting on the Canadian banks for dividends, their track record suggests that you can feel safe doing so.
A simple choice
That being said, not all of Canada’s banks are equal. Some are riskier than others.
So if you’re looking for a safer bank, Toronto-Dominion Bank (TSX: TD)(NYSE: TD) is likely your best option. This is because TD is more focused on retail banking, which is lower-risk – last year, this accounted for over 90% of net income. By contrast, Royal Bank of Canada (TSX: RY)(NYSE: RY) derives over a quarter of its net income from Capital Markets, which is riskier and less transparent by nature.
At the end of the day, one point should be made clear. Don’t count on the banks to eliminate, or even disclose, all of their risks. It’s up to us as investors to decide how much risk we can handle. The good news is that all of Canada’s banks have a pretty safe dividend.
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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 has no position in any stocks mentioned.