Just How Much Can We Count On the Canadian Banks?

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.

If you’re looking for more information on the Canadian banks, be sure to check out the free report below.

Do you own bank shares? You won't want to miss our latest report!

Canadian banks are considered must-have investments. After all, they're very stable, well-capitalized, and face limited competition. That said, there are concerns for the banks and their investors. In this FREE report, we cover everything you need to know about Canada's Big 5 -- whether you're already an investor or are considering buying shares. Simply click here to receive your special FREE report, “What Every Bank Shareholder MUST Know."

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

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