The Canadian banking industry is top heavy with the Big Six controlling over 90% of the industry. In addition, the government has large barriers to entry in place, which further strengthens these companies’ positions as industry leaders and helps secure future returns.
Although 90% of the industry is garnering all of the attention, are there hidden gems lying in the other 10%? Laurentian Bank of Canada (TSX: LB) and Canadian Western Bank (TSX: CWB) are among this 10%; they have quietly performed very well. Do they belong in your portfolio?
Here’s a look at both companies.
Laurentian
Laurentian is currently the ninth-largest bank in Canada with over $40 billion in assets. The company has closed some of its underperforming locations in an effort to cut costs and push its mobile and online offerings. Therefore, the company should be able to continue to strengthen its cash flow while keeping up with the technological shift in the industry.
From a valuation perspective, the company holds a price-to-earnings ratio of 13, which is below five of the six big banks. Therefore, investors aren’t overpaying for a juicy dividend yield of 4.14%. In addition, the company boosts a beta of 0.58, meaning if a market correction occurs in the near future, investors can still receive a generous payout without much damage to the stock price.
Canadian Western
Canadian Western is the 10th largest bank in Canada with over $25 billion in assets. The company offers many of the same services as the larger banks; however, over 71% of its revenue is derived solely from British Columbia and Alberta. Therefore, the company doesn’t have the international reach that the larger players have in the industry.
As for investor returns, the company has been able to grow its dividend by an average of 13% annually since 2011. Combined with a payout ratio below 45%, the company should be able to sustain and grow its current dividend yield of 3.2% and provide steady returns for investors.
Foolish bottom line
Although these are solid companies, their opportunity for growth is limited. In order for the banks to expand their current operations, they need to either steal market share from competitors or open locations in international markets. Since neither of these companies can do this on the same level as the Big Six, the growth potential for both companies is somewhat capped.
I’d recommend sticking with the larger players in the industry. With only six banks controlling 90% of the market, you’re better off investing in banks that have more international exposure and a larger capacity to grow.
