Investing in the banking sector is one of the most rewarding options for long-term investors. That’s generally due to the relatively impressive total returns these banks provide. Indeed, a combination of growth and dividend income provides a reason for any investor to get behind these stocks. The question is, which top Canadian bank is worth buying (they all look pretty similar, after all)?
I think there are some different catalysts and factors to consider when it comes to Canadian banks. Accordingly, I thought it would be interesting to dive into the differences between two of the largest and most prominent lenders in Canada in this piece.
Let’s dive in!
Scotiabank
Bank of Nova Scotia (TSX:BNS), known as Scotiabank more colloquially, is a global financial services company focused on several key segments. These include Canadian banking, global wealth management, international banking, global banking and markets and others. Scotiabank offers a wide range of services and products to customers and predominantly operates in Central and South America. Thus, this is a Canadian bank that’s often considered for its international exposure.
I think Scotiabank’s unique footprint in higher-growth Central and Latin American nations certainly provides a unique thesis for investors to consider. While this business model hasn’t translated into multiple expansion (just take a look at the stock price above), long-term investors have done well owning this stock through ups and downs.
Additionally, one of the key things I like to focus on when it comes to comparing bank stocks is these companies’ betas. Scotiabank’s five-year monthly beta comes in at 0.96, suggesting this stock moves in a less-volatile fashion compared to the market. Accordingly, for investors looking to own Scotiabank as a proxy of the Canadian economy, its lower volatility makes this stock an excellent option to consider.
Scotiabank’s current valuation multiple is reasonable, at 11 times earnings. And this bank does offer a very juicy dividend yield of 6.6%, making it a top option in my book right now.
Canadian Imperial Bank of Commerce
Canadian Imperial Bank of Commerce (TSX:CM) is the fifth-largest bank in Canada, with approximately 11 million customers. It has three business segments: wealth management, retail and business banking and capital markets and primarily operates in Canada.
CIBC is known for its Canadian focus and is perhaps the most Canada-centric bank of the Big Five domestically. Thus, for investors looking for true exposure to the Canadian economy, this is the bank I think is worth looking at.
Now, CIBC’s relative performance has been strong of late, leading to a higher valuation multiple and lower yield than Scotiabank. Some of this may be due to increasing bets that Canada’s economy may come out ahead over the next five years relative to other key economies. While I’m not sure that’s the case, this is how the market appears to be voting right now.
At 12 times earnings and with a yield of 5.7%, CIBC is certainly among the top options for long-term investors seeking Canadian exposure right now.
Bottom line
If I had to choose between these two, my top pick would have to be Scotiabank. I like the lender’s geographic diversification, its relatively more attractive valuation, and its higher yield. In this market, with banks often viewed as bond proxies, investors need to see a higher yield premium. At least, that’s my view. And Scotiabank provides that.
Additionally, I think the Canadian economy will show relative weakness and slow growth for the coming decade. Thus, I think Scotiabank is the preferable option for investors with a time horizon of 10 years or longer.
