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A Review of the Best of Canada’s Smaller Banks

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Earlier this week, I offered a comparison to investors on two of the big banks, highlighting which bank was the better option for investors and if a bigger bank really was better.

Today, let’s evaluate a few of the smaller banks as investments.

Strong domestic network with international reach

National Bank of Canada (TSX:NA) is the sixth-largest lender in Canada and the smallest of the Big Six. Montreal-based National is predominately recognized within Quebec, where the bulk of earnings, including a strong mortgage portfolio, is derived.

That’s not to say that National doesn’t have an international presence. The U.S. Specialty Finance and International division of the bank posted a healthy 14% year-over-year improvement in the most recent quarterly update.

In terms of results, the personal and commercial arm of the bank reported net income of $234 million in the most recent quarter, reflecting a solid 9% gain over the same period last year. Net income for the quarter came in at $558 million, or $1.51 per diluted share. Overall, this represented a gain over the amount posted in the same quarter last year but below the $1.51 per diluted share that analysts were forecasting.

National announced a hike to its dividend, which now provides a competitive yield of 4.40%, which is more than competitive with the big banks.

National currently trades at just over $61 with a P/E of 10.19.

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Turn west for growth

Canadian Western Bank (TSX:CWB) is a different bank to consider. Canadian Western is concentrated on the Albertan economy, with a third of the bank’s loan activity coming from Alberta. In other words, Canadian Western’s performance fluctuates along with the resource-rich Albertan economy.

At the moment, that means that Canada’s 10th-largest lender is trading at a discount.

That’s not to say that Canadian Western isn’t looking outside the Albertan and B.C. markets. The bank has moved to expand outside the west, with a growing loan portfolio in Ontario now making up a third of new loans.

Turning to dividends, Canadian Western provides a respectable 3.69% yield. While this is not the highest yield among Canadian banks, it is one of the most secure thanks to conservative payout ratio that comes in at under 40% of earnings. In the most recent quarter, the ratio was 36% and Canadian Western is targeting a payout ratio of 30%. By way of comparison, the big banks have payout ratios near 50%.

Canadian Western trades at just below $30 with a  P/E of 10.17.

A growing dividend awaits

Montreal-based Laurentian Bank (TSX:LB) often flies under the radar of most investors. Laurentian has a small presence in the U.S. market, but most of the bank’s income hails from Quebec.

In terms of results, Laurentian’s recent quarterly update missed expectations. The bank posted earnings of $43.3 million, or $0.95 per share, compared with $59.2 million, or $1.34 per share, in the same period last year.

The bank attributed the miss to a host of now-resolved issues at the bank, including a labour relations issue and an ongoing initiative to reduce costs, boost profits, and expand the use of technology. Over the trailing 12-month period, growth has remained relatively flat, but over the past two years, Laurentian’s stock has dropped over 10%.

The higher risk of investing in Laurentian comes with a higher reward. The bank currently offers an appetizing 5.78% quarterly dividend which has grown over 25% in the past five years, including a 1.5% hike earlier this year.

Laurentian trades at just over $45 with a P/E of 10.83.

Where should you invest?

All three of these smaller banks offer investors a solid path towards growth- and income-focused goals that are not reliant on the big banks. This makes them ideal holdings to balance a portfolio that already has one or more of the big banks.

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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 Demetris Afxentiou has no position in any of the stocks mentioned.

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