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Bank Stocks

What are bank stocks?

Bank stocks represent partial ownership in a financial institution thatā€™s licensed to hold and loan money. Over time, bank stocks have been relatively safe investments, as they offer products and services that most people need.

How do you choose a good bank stock?Ā 

1. Look at the bankā€™s profitability

First, you want to be sure the bank is even profitable. To do that, you can use the following metrics.Ā 

  • Return on equity (ROE): this metric tells you how much profit a bank makes from its shareholderā€™s equity. The higher this metric, the more efficient a bank is using its stakeholderā€™s money.Ā 
  • Return on assets (ROA): the ROA tells you the overall profit a bank makes in relation to its assets. The higher the ROA, the more profit a bank makes from its assets.Ā 
  • Efficiency ratio: the efficiency ratio tells you how much revenue a bank uses towards its operating costs. The lower the efficiency ratio, the more revenue a bank theoretically has.Ā 

2. Assess the bankā€™s risksĀ 

One of the biggest risks a bank has is losing money on an outstanding loan. As with profitability, a couple metrics could help you see how much banks are losing.

  • Nonperforming loans ratio (NPL): Nonperforming loans are loans that are at least 90 days past their due date. A bank with a low percentage of NPL (2% is a good ratio) is doing fairly well collecting loan repayments from its customers.Ā 
  • Net charge-offs: a net charge-off is a bankā€™s declaration stating that a loan hasnā€™t been paid and is unlikely to be paid. As with NPLs, the less net charge-offs a bank has, the less money itā€™s losing on outstanding loans.Ā 

3.Ā  Check back here for our top picksĀ 

Finally, weā€™ll keep this page updated with our staff writerā€™s reviews and assessment of Canadaā€™s bank stocks. Our writers often use these metrics to help investors see which bank stocks are doing well and which are doing poorly.Ā 

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Check back here for the most up to date information about bank stocks in Canada.

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Frequently Asked Questions

Why invest in bank stocks?

Quality bank stocks have a strong history of generating profits and managing crises, making them a great investment.

In addition to their strong performance, many of Canadaā€™s top banks pay dividends, with payouts that increase over time. For Canadian investors looking to pocket a little extra from their stocks, dividends can help you buy more shares or more cash.

Finally, bank stocks can help diversify your investing portfolio. If you already have stocks in other sectors (mining, technology, energy), bank stocks could add much needed stability, as well as expose you to the gains in another sector.