The numbers are in, and the results are official. 2019 was a decent year for Canada’s top banking stocks, although the group lagged the overall stock market.
The TSX Composite Index posted a total return of just over 22%, while an equal position in Canada’s six largest banks returned approximately 16% including reinvested dividends. Although the sector failed to outperform the index, I doubt many investors are unhappy with a 16% return.
The best performer by far was National Bank, which had a total return of nearly 30%. Bank of Montreal came in second, with a 17% total return. Royal Bank, TD Bank (TSX:TD)(NYSE:TD), and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) rounded out the top five, with returns in the 12-14% range. Bringing up the rear was CIBC (TSX:CM)(NYSE:CM) with a total return of approximately 11%.
What does 2020 have in store for Canada’s banks? Which names will outperform the rest? Let’s take a closer look at the three I think will outperform.
Bank of Nova Scotia
I’m a big Bank of Nova Scotia bull over the long term. A big reason for my bullishness is the company’s foreign operations.
Scotiabank has been expanding into Latin America for 20+ years now, amassing serious assets in nations like Mexico, Peru, Colombia, and Chile. In fact, earnings from these nations account for about 30% of the company’s total bottom line.
I like these Latin American economies for a few reasons, including better overall growth potential, higher interest rates (which leads to better net interest margins), and an ever-expanding middle class, folks that will need banking services for the first time.
Scotiabank also offers a low valuation (shares trade at under 10x 2020’s expected earnings), solid Canadian operations, and one of the better dividend yields in the sector. The payout is 4.9%.
TD Bank
Despite posting solid results over the entire year last year, the last six months haven’t been terribly kind to Toronto-Dominion Bank shares. The stock is just barely above a six month low, which makes an excellent buying opportunity.
TD Bank might be Canada’s finest banking stock. The company’s management does a great job, a devotion to quality that shows up in the financial statements.
Let’s start with the Canadian operations. TD’s mortgage business continues to gain market share. Its wealth management division is excellent, and well positioned to gain more assets under management.
TD’s slate of credit cards are competitive. It even has a solid insurance division. While many of its peers reported a dip in earnings from their Canadian operations, TD was able to post a small gain last year.
Next is the company’s U.S. operations, which includes retail banking along the East coast and a substantial investment in TD Ameritrade.
These are solid assets that are well positioned to gain more market share by both organic expansion and acquisitions. Profits from its U.S. operations rose 7% in 2019.
Thanks to the weakness in TD’s share price, the dividend has just crept up to a 4% yield. This is a rare occurrence; investors should take advantage.
CIBC
Despite having solid domestic operations and finally expanding into the United States, CIBC shares continue to underperform. I predict 2020 will be the year this reverses itself, with the smallest of Canada’s Big Five banks having a good year.
CIBC shares are ridiculously cheap on two important metrics. Let’s start first with the price-to-earnings ratio. As I type this, the stock trades for $107.87. Analysts predict the company will earn $12.47 per share in 2020, giving the stock a forward price-to-earnings ratio of just 8.6 times earnings, which translates into a forward P/E ratio of between 10-20% lower than its peers.
The stock is also cheap on a dividend basis. The current yield is 5.3%. To put it another way, it has a 32% higher yield than TD Bank. Loading up on CIBC shares is a simple way to give yourself an ample raise.
The bottom line
Betting on Canadian bank stocks has been a wonderful decision for the last century, and I believe investors who own the whole sector will continue to benefit, but I just think that Bank of Nova Scotia, TD Bank, and CIBC have a little better short-term return potential.
Even if the next year doesn’t go to plan, I doubt you’ll regret owning these stellar long-term investments.
