Most investors, Canadian or otherwise, are well aware of the upside of investing in top Canadian bank stocks.
These banks remain some of the most robust dividend stocks in the market, paying out higher dividends than most sectors, while also having some of the best capital appreciation profiles over the very long term.
Indeed, banks such as Toronto-Dominion Bank (TSX:TD), Royal Bank of Canada (TSX:RY), and Bank of Nova Scotia (TSX:BNS) have been among my top picks for some time.
Let’s dive into why these banks could continue to outperform for years and decades to come.
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Incredible profitability and return on equity
Besides the fact that most investors are well aware that Canadian banks benefit from a robust regulatory environment, unlike most countries, have shown resilience in previous downturns, and have some of the most stable and diversified business models among their global peers, I’d argue that fundamentals play a larger role in assessing these banks’ upside in the global context over time.
In fact, Canadian banks have exhibited an extremely high return on equity (ROE) of around 14% over the past decade. This compares with the ROE of the broader Canadian stock market, which is closer to 10%.
Return on equity matters, as that’s a primary metric by which many institutional investors assess a given company’s underlying strength. This metric suggests that the capital controls in place by Canadian banks are superior and could lead to superior returns over time as well.
Will this dynamic continue?
Of course, ROE is just one metric. On other metrics, such as price/earnings or price/sales, there’s an argument to be made that other global banks may be cheaper or more value-focused picks right now.
But given the total picture, which includes the stability of the Canadian banking system and the robust and mature nature of this market, I’d argue that Canadian banks are undervalued relative to their quality and long-term growth potential.
Those seeking high ROE assets in a time like this ought to consider Canadian banks as a part of their portfolio structure. That’s my view at least.
