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Evaluating Canada’s Banks: The Conclusion

Last week, I wrote six articles about Canada’s big banks. For readers wanting to review any of the articles in more detail before proceeding, here are the links:

National Bank of Canada (TSX:NA): click here.

Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM): click here.

Bank of Montreal (TSX:BMO)(NYSE:BMO): click here.

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS): click here.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD): click here.

Royal Bank of Canada (TSX:RY)(NYSE:RY): click here.

After looking into several key metrics of each institution, it has become clear which bank is currently offering investors the best chance for upside at the most reasonable price. Out of the six banks, the top pick is CIBC.

In the articles, we considered a number of basic factors which included the price-to-earnings (P/E) ratio, the dividend yield, the compounded annual growth rate (CAGR) of dividends, and the changes in earnings and returns on equity. Depending on the bank, there may also have been a few other factors brought into the mix.

Beginning with earnings per share (EPS), all Canadian banks, except for National Bank of Canada, grew earnings between fiscal 2013 and fiscal 2016. The average CAGR of EPS, excluding National Bank of Canada, was just shy of 7% per year. EPS at CIBC increased at a rate of 9.7%, beating the average.

Out of earnings made by each company, CIBC paid out the lowest portion in dividends. In 2016, the company paid out only 44.4% of earnings as dividends in comparison to the industry average of approximately 47%. Given this lower payout ratio, investors need to realize that the company has been able to better utilize its retained capital by conducting share buybacks from 2013 to 2016. The total shares outstanding decreased by the most of any Canadian bank (as a percentage of the starting point). Apart from CIBC, only Bank of Nova Scotia reduced the total share count.

Given that CIBC was successful in deploying capital into a share-buyback program, the total amount of equity retained also did not increase to an amount higher than needed. The company’s total amount of equity reported on the balance sheet increased by approximately 30% which is much less than the industry average of 39%.

As the company remains the fifth-largest bank out of the top six, investors may still have a lot of runway for growth.

Although CIBC is a Canadian-focused institution, many investors may still want to consider other names depending on the kind of exposure they are looking for. Shares of Bank of Nova Scotia have a significant amount of exposure in South America, while Toronto-Dominion Bank has a significant presence in the United States.

Out of the six banks, if there were a requirement to short-sell one of them, it would have to be National Bank of Canada.

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Fool contributor Ryan Goldsman has no position in any stocks mentioned.

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