While Canada’s Big Six bank stocks – Royal Bank, TD, BMO, Scotiabank, CIBC and National Bank – absorb most of the financial sector’s limelight, they are by no means the only game in town when it comes to helping customers with their money and creating shareholder value.
A select group of smaller Canadian-listed banks operates in the shadows of these household names, innovating in the gaps they have yet to fill, and distinguishing themselves by catering to specialized and more digitally savvy customer bases.
How we picked the best-performing Canadian bank stocks
To put our list together, we turned to The Globe and Mail screener and searched for common stocks in the financial sector listed on Canadian exchanges that have returned at least 10 per cent year-over-year.
We then sorted from the highest to the lowest return and picked the first 10 stocks that offer personal, merchant or investment banking services, while excluding pure-play lenders and investment managers to avoid an overly narrow focus. Here’s what we found:
- National Bank of Canada: 14.24 per cent return.
- FRNT Financial: 15.38 per cent return.
- Canadian Imperial Bank of Commerce: 18 per cent return.
- Royal Bank of Canada: 18.96 per cent return.
- EQB: 29.61 per cent return.
- Sagicor Financial Company: 44.14 per cent return.
- VersaBank: 47 per cent return.
- Manulife Financial: 48.65 per cent return.
- Canadian Western Bank: 71.15 per cent return.
- Galaxy Digital Holdings: 122.68 per cent return.
- (Returns, share prices and market capitalizations are as of July 12, 2024)
Let’s dive right in with the last stock on our list, a Big Six representative, and why it might deserve a place in your portfolio.
10 best-performing Canadian bank stocks
10. National Bank of Canada: 14.24 per cent return
National Bank of Canada, market capitalization C$38.68 billion, is the sixth-largest among the country’s Big Six banks. Founded in 1859, the institution has grown to serve more than 3 million clients and holds C$442 billion in assets distributed across personal and commercial banking, wealth management, capital markets and U.S. specialty finance and international.
National Bank is actively on the lookout for expansion opportunities to catch up to its larger peers and grow beyond its leading presence in Quebec. Last month’s pending C$5 billion acquisition of Canadian Western Bank, the first runner-up on our list, promises to broaden its reach in Western Canada with a consistently profitable operation to the tune of about C$300 million per year since 2019.
Long-term investors in National Bank have collected an 11 per cent return over the decade ended October 2023, including a dividend that has grown from C$1.70 to C$3.98 annually over the period at an average payout ratio of only 42 per cent.
National Bank stock (TSX:NA) last traded at C$113.65 per share.
9. FRNT Financial: 15.38 per cent return
Toronto-based FRNT Financial, market cap C$16.75 million, is a cryptocurrency-focused company active across five business lines, including trading services, institutional structured derivative products, merchant banking, advisory and consulting and principal investments.
Founded in 2018, FRNT has been profitable since inception after adjusting for one-time costs, unlike the vast majority of other crypto stocks, and believes it has a differentiated advantage when it comes to growing into the underdeveloped institutional crypto market, backed by:
- A broad range of crypto products.
- The ability to accommodate transactions of up to US$1 billion.
- Emerging opportunities in the United Kingdom and Europe, with the company currently pursuing Financial Conduct Authority registration.
With crypto investors surpassing 500 million in January and the currencies’ total market cap reaching C$2.87 trillion as of July 10, management is betting that its picks-and-shovels value proposition for institutions will become increasingly prized as regulation integrates crypto into everyday life.
De-risked by 70 per cent insider ownership, FRNT Financial stock (TSXV:FRNT) remains down by 78.5 per cent since inception, last trading at C$0.45 per share.
8. Canadian Imperial Bank of Commerce: 18 per cent return
The Canadian Imperial Bank of Commerce (CIBC), market cap C$63.17 billion, serves approximately 14 million personal banking, business, public sector and institutional clients across North America and internationally.
The second Big Six bank on our list, established in 1867, has accumulated a little more than C$1 trillion in assets as of Q2 2024 across a diversified balance sheet (slide 60) and sees further growth ahead propelled by:
- Profitable operations averaging C$5.25 billion in annual net income since 2019
- A comprehensive AI strategy blending traditional machine learning and generative AI (slide 15)
- The cooling of North American inflation
Investors in CIBC have enjoyed double-digit returns on common stock since 2019 and a 5 per cent compound annual growth rate on the dividend since 2009. The company will pay out C$3.60 per share this year, representing a conservative payout ratio of about 50 per cent.
CIBC stock (TSX:CM) last traded at C$66.99 per share.
7. Royal Bank of Canada: 18.96 per cent return
Royal Bank of Canada, market cap C$214.50 billion, is Canada’s biggest bank and one of the top 15 largest in the world. Its almost 100,000 employees serve more than 18 million clients in 29 countries, reinforcing leadership positions in wealth management, capital markets and personal and commercial banking built on innovation and strategic investments.
The third and final Big Six member on our list carries more than C$2 trillion in assets on its balance sheet. This includes C$943 billion available for retail and commercial loans, positioning the company to be patient, leverage its scale, and capitalize on opportunities created by changing market dynamics.
Royal Bank investors averaged a more than 11 per cent annual return from 2013 to 2023 supported by averages of 7 per cent for earnings per share and 8 per cent for the dividend. Income investors collected C$5.34 per share in 2023 at a payout ratio of about 50 per cent.
Royal Bank stock (TSX:RY) last traded at C$151.58 per share.
6. EQB: 29.61 per cent return
EQB, market cap C$3.66 billion, is a digital financial services company know for its flagship Equitable Bank – Canada’s seventh largest bank by assets – whose high-interest savings account ranks among the highest-yielding in the country.
The Canadian bank stock holds more than C$123 billion in combined assets under management and administration, serves more than 639,000 customers and more than 6 million credit union members, and offers exposure to its wealth management business, ACM Advisors, which specializes in alternative assets.
Investors in EQB have earned a 12.5 per cent annual return over the decade ended Q2 2024, including a 20 per cent compound annual growth rate on the dividend from C$0.42 in 2016 to C$1.50 in 2023. This track record of shareholder value creation is fortified by a loan book that is almost 100 per cent secured, well ahead of National Bank, CIBC and Royal Bank, which each engage in unsecured funding.
EQB stock (TSX:EQB) last traded at C$95.64 per share.
5. Sagicor Financial Company: 44.14 per cent return
Sagicor Financial, market cap C$903.37 million, is a more than 180-year-old financial services company offering life, health and general insurance, banking, pensions, annuities, investment management and real estate brokerage services.
The company’s entrenched market presences have allowed it to collect more than US$600 million in total net income since 2019, despite pandemic-based challenges. It has been operating in Canada for more than 90 years and in the United States for more than 70 years, and it is the largest life insurance company in the English-speaking Caribbean.
Management believes the company is in a prime position to leverage its well-capitalized balance sheet and execute on further growth by shoring up the under-pensioned and under-insured Caribbean region.
Sagicor Financial stock (TSX:SFC) last traded at C$6.40 per share.
4. VersaBank: 47 per cent return
VersaBank, market cap C$388.17 million, is a Canadian Schedule I chartered bank and the world’s first fully digital financial institution since 1993. The branchless institution currently holds about C$4 billion in loans and has posted virtually no losses as a lender in its three-decade history thanks to a strong risk-mitigation philosophy (slide 6).
Shareholders have benefitted from increasingly profitable operations from C$18 million in 2018 to C$42 million in 2023 – plus a little more than C$24 million collected through the first half of 2024 – resulting in about a 123 per cent return over the period.
An imminent U.S. acquisition offers the company a runway to expand its proven receivables purchase program, which issues loans to consumers and small businesses for “big ticket” items.
VersaBank stock (TSX:VBNK) last traded at C$14.95 per share.
3. Manulife Financial: 48.65 per cent return
Manulife Financial, market cap C$66.03 billion, provides financial advice, insurance and investment management for more than 35 million customers across the world.
Financial advice and insurance are offered under the Manulife brand across Canada, Asia, and Europe, and primarily as John Hancock in the United States, while wealth and asset management, under Manulife Investment Management, are available for individuals, institutions and retirement plan members worldwide.
Management grew earnings per share by 7.9 per cent and the dividend by 10.1 per cent annually from 2017-2023, and it has identified multiple vectors for future global growth (slide 23).
Manulife stock (TSX:MFC) last traded at C$37 per share.
2. Canadian Western Bank: 71.15 per cent return
Canadian Western Bank, market cap C$4.38 billion, operates nationwide full-service platforms for business and personal banking, specialized financing, comprehensive wealth management, and trust services.
As Canada’s only full-service business bank, Canadian Western has carved itself a niche in the country’s industrial landscape marked by deep expertise proven through economic cycles. Its C$37.2 billion loan book features low write-offs and concentrated presences in major markets such as British Columbia, Alberta and Ontario, while its C$36 billion in deposits are diversified to better endure the evolving market climate (slide 8).
The company is focused on growth in Ontario and the underserved nationwide mid-market segment, both of which should be expedited thanks to leverage from its new acquirer, National Bank, the No. 10 stock on our list.
Canadian Western Bank stock (TSX:CWB) last traded at C$45.32 per share.
1. Galaxy Digital Holdings: 122.68 per cent return
Galaxy Digital Holdings, market cap C$5.3 billion, operates a global digital asset and blockchain platform spanning trading, lending, strategic advisory, institutional-grade investment solutions, proprietary Bitcoin mining and hosting, network validator services, and the development of enterprise custodial technology.
Galaxy has accumulated US$7.7 billion in assets under management since 2018 and believes it can bolster market share – backed by a holistic offering and partnerships with world-leading financial institutions – over the decades of growth ahead for digital assets.
Despite the nascent crypto market’s considerable volatility, Galaxy managed to pull in more than US$700 million in net income from 2023 to Q1 2024. It should continue to generate more from a US$2.2 billion investment banking pipeline and one of the lowest-cost Bitcoin mining operations in the industry at under US$19,500 per coin.
Galaxy Digital stock (TSX:GLXY) last traded at C$15.61 per share.
The risks of investing in Canadian bank stocks
Before you go fill your portfolio with any of the picks on our list, you should have a sense of how bank stocks tend to behave:
- Firstly, bank stocks react to changes in interest rates. A rate hike causes stocks to rally because banks can charge more for loans, while a cut depresses share prices for the opposite reason.
- Secondly, banks are vulnerable to periods of slow economic development, when the desire to invest or borrow money cuts into their revenue and ability to stir market sentiment with new growth.
- Finally, banks are ever exposed to the risk of a mismatch between the capital they have on hand and the investments they make, meaning they require constant monitoring to ensure adequate risk management. However, no bank can be totally immune to a panic-based run, as most recently evidenced by the fall of Silicon Valley Bank.
In sum, owning bank stocks results in uncontrollable regulatory risk and heightened sensitivity to economical ups and downs. That said, both of these can be offset by residing in a strong economy like Canada, backed by robust natural resources and a rich immigration program, that offers long-term potential for growth and brand differentiation.
How to buy shares in Canadian bank stocks: A step-by-step guide
Once you’ve put a few bank stocks through your personal due diligence process, keeping in mind factors such as asset allocation, financial goals and risk tolerance, you can follow these five steps to buy shares and manage them over your chosen time horizon:
- Right-size your investment: Only invest in bank stocks as part of a diversified portfolio across industries and geographies to maximize your chances of positive long-term returns.
- Pick the appropriate investment account: Canadians enjoy a broad assortment of accounts catering to a diversity of needs, including retirement, education, disability and buying your first home.
- Sign up with an account provider: While larger financial institutions such as Canada’s Big Six banks offer more holistic service suites, lower-cost providers such as Questrade and Wealthsimple are likely more amenable to the self-directed investor.
- Enter your order: Start by searching for the company’s stock ticker using the search bar on Stockhouse. Once identified, open your provider’s trading platform and locate the order page. Proceed to enter the ticker, the number of shares you’d like to buy, and a limit price one or two cents above the ask price, and set the order to be good until end of day. Go ahead and press the “buy” button.
- Rebalance: Your new investment in bank stocks should remain in line with your portfolio’s overall asset allocation. To achieve this, simply trim it when it gets too big or invest more when it underperforms, at minimum on a yearly basis. As a rule of thumb, an equal weighting across the 11 sectors in the stock market would result in a 9 per cent allocation to financials.
What kind of exposure do you have to Canadian bank stocks? What should be on an investor’s checklist before adding new names to their portfolio?
Join the discussion: Find out what everybody’s saying about Canadian bank stocks on the National Bank of Canada, Canadian Imperial Bank of Commerce, Royal Bank of Canada, FRNT Financial Inc., EQB Inc., Sagicor Financial Company Ltd., VersaBank, Manulife Financial Corp., Canadian Western Bank and Galaxy Digital Holdings Ltd. Bullboards, and check out Stockhouse’s stock forums and message boards.
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