Over the years, owning the Canadian banks has been pretty much a guaranteed profit for investors. Sure, they had a few periods like 2008-09 and some individual blow-ups, but for the most part, Canada’s banks have been a great investment for buy-and-hold investors.
Although there are always going to be headwinds affecting their business, there’s little indication that Canada’s banks won’t be great investments in the future. Each bank is ran by competent execs, and collectively they enjoy a huge barrier to entry. They’ve adequately protected themselves from risks in the housing market, and even if the oil patch continues to weaken, defaults on loans given to the sector will be nothing more than a distracting sideshow.
In short, Canada’s banks look about as secure as ever.
But which bank should you own? Let’s take a closer look at two of the larger ones, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) and Royal Bank of Canada (TSX:RY)(NYSE:RY), to see which one you should own.
Valuation
All of Canada’s banks are trading at pretty cheap valuations, even when compared to their peers in the U.S. and Europe.
Royal Bank currently trades at a P/E ratio of 12.9x, which is actually among the highest in the sector. Earnings are projected to grow to $6.46 in 2015, which puts the stock at 11.8x forward earnings. It should be noted that Royal Bank recently agreed to acquire City National Corporation in the U.S. for US$5.4 billion, which will likely add to earnings in 2016.
Bank of Nova Scotia is currently cheaper than Royal Bank, trading at just 11.8x trailing 12-month earnings. The company is expected to grow earnings slightly to $5.74 per share for fiscal 2015, which puts it at 11.7x forward earnings.
Although Royal Bank is more expensive than Bank of Nova Scotia on a P/E basis, I feel the premium is worth it. RBC is expected to grow earnings nicely, while analysts are saying that Bank of Nova Scotia’s earnings will likely be flat.
Long-term growth
Royal Bank’s acquisition of City National is an interesting one. The company was increasingly facing investor pressure to expand further into the United States, since Canada is seen as a mature market. But as soon as the newest acquisition was announced, the market immediately rallied against the deal. The stock fell on a day when the company’s peers went up, and analysts who cover City National were praising that company’s management for getting a good price.
Still, City National will add to Royal Bank’s business, and in a slightly different way than buying a normal savings and loan. City focuses on high net-worth individuals like actors, tech superstars, and health care professionals. Considering Royal Bank’s skill at cross-selling, getting access to that kind of client must have been appealing.
Scotiabank, meanwhile, continues to focus its international expansion in Latin America. Although recent results were a little weak, the company still continues to enjoy terrific interest margins from its international operations. They’re also located in fast-growing areas of the world.
Dividends
Both companies have an almost unmatched record of rewarding shareholders. Each have been consistently paying dividends since the 1800s.
Thanks to the recent rally in shares, Bank of Nova Scotia recently fell below a 4% yield, currently sitting at 3.9%. The company has hiked its dividend a total of 8 times since the beginning of 2010, increasing the quarterly payout 35% during that time. It also bought back 4.5 million shares in 2014.
Royal Bank has a nearly identical 3.9% current yield. It has only hiked its dividend 7 times since the beginning of 2010, but the quarterly dividend has risen 50% in that time, from $0.50 per share to $0.75. The payout ratio is 50% of net earnings, compared to 47% for Bank of Nova Scotia.
Those dividends are both fantastic. It’s hard to pick a favorite.
Which should you own?
Both these banks look to be terrific performers over the long-term. I think investors will end up being pretty happy with the results no matter which one they pick. I’d pick Bank of Nova Scotia as my favorite, simply because I think Royal Bank overpaid for City National.
