The Big 5 Canadian Banks: What's The Difference?

Includes: BMO, BNS, CM, RY, TD
by: Get Rich Brothers

The Big Five Canadian Banks are often grouped as one entity.

Each of the banks have their own specialties.

We will examine what makes each bank unique.

As a Canadian investor, one of the questions I get most frequently from foreign investors is what the big difference is between the Big Five Canadian banks (the "Banks"). Many investors and market commentators tend to lump them together into one large grouping with the tag line being, "The solid Canadian financial firms" or something to that effect.

To put these diverse businesses all into one homogeneous grouping would be to do them each a particular disservice because while they do share some similarities, they each have unique differentiating characteristics.

We will discuss each of the Banks in descending order of current market capitalization. The goal will be to show that investing in one Canadian bank is not the same as investing in another.

Before profiling each, let us first take a look at what commonalities they share.

Banks Market Capitalization [USD] Dividend Yield [%]
Royal Bank (NYSE:RY) ~ 87 Billion 4.15
Toronto-Dominion Bank (NYSE:TD) ~ 79 Billion 3.86
Bank of Nova Scotia (NYSE:BNS) ~ 61 Billion 4.40
Bank of Montreal (NYSE:BMO) ~ 39 Billion 4.29
Canadian Imperial Bank of Commerce (NYSE:CM) ~ 29 Billion 4.69


Each of the Banks are Schedule I operators, meaning they are domestic institutions which may accept deposits qualifying for deposit insurance of up to $100,000 by the CDIC. Each of the Banks compete in the bread-and-butter categories of collecting deposits and loaning mortgages. These basic segments set the stage for cross-selling across other platforms such as investments and credit card services.

The Banks are recognized internationally for their financial strength. They tend to each feature prominently in global rankings by respected publications. The World Economic Forum has, for example, ranked the soundness of Canadian Banks in first place globally for the seventh consecutive year in its 2014-2015 report, citing the general health and sound balance sheets overall.

Through the financial crisis, each of the Banks held their dividends steady and have subsequently increased their payouts to shareholders by varying degrees. This is in stark contrast to the situation which presented itself elsewhere and saw many of the largest banks the world over rattled to the core. Bank of America Corporation (NYSE:BAC), for instance, cut its dividend to a penny per quarter when it had previously been considered one of the strongest dividend payers around.

All of the Banks have their operational head offices in Toronto, Ontario. Bay Street in Toronto is the Canadian equivalent of the American Wall Street.

Trends currently taking place within the Banks include:

· A push to gain wealth management business.

· Heightened competition over mortgages and deposit-taking.

· Increased insurance offerings.

· The acquisition and consolidation of low-cost online banks.

Royal Bank of Canada

RY is the largest financial institution in Canada. It was founded in 1864 in Halifax, Nova Scotia.

RY is focused on maintaining its leading position in Canada while also growing globally. In terms of revenues, the company receives a huge 64% from Canada with the remaining 36% split equally between U.S. and International operations.

In the international category, RY has sizeable operations in the Caribbean. It maintains branches in eighteen countries and territories. Coupling the Caribbean with the U.S., the bank reported Q1 clients in the amount of 1.4 million versus over 12 million in Canada. This demonstrates both RY's size in Canada as well as the reliance it has on the home-operations. RY's challenge will be growing outside of Canada in the years to come.

While RY still operates in the U.S., it has seen its share of problems with this expansion in the past years. In 2011 and after losing several billion dollars over the years in some U.S. personal and commercial operations, it actually cuts its losses and sold a network of branches to PNC Financial Services Group at the time. I view competing in the U.S. to be a key priority for RY going forward.

RY has been setting itself apart over the past few years as an insurance operator. It has been recognized as one of the fastest-growing insurance organizations in Canada. The Banks have long desired to fully enter this field, though regulatory restrictions have prevented the sale of insurance within the same branches offering credit products. This has resulted in the opening of insurance offices adjacent to the flagship retail banks.

Over the past ten years, RY has grown its dividend at a healthy clip for a CAGR of ~10%, demonstrating its superior financial strength during a period including the financial recession. With a payout ratio of around 45%, the company is performing well within its target range of 40-50%.

Toronto-Dominion Bank

TD has roots tracing as far back as 1855. It ranks second in terms of size for the Banks.

TD has been competing heavily on the retail side of the business by extending its store hours and looking to broaden market share by being a more convenient bank than its peers. Unsurprisingly, by taking this tact and using it effectively, TD has been topping J.D. Power Canadian Retail Banking surveys for nine consecutive years.

U.S. expansion has been one of the highlights of TD's operations over the past decade. Through the financial crisis, TD was busy acquiring well-priced assets in order to enlarge its U.S. footprint under its, "TD Bank, America's Most Convenient Bank" platform. In 2010 the company acquired Chrysler Financial's Canadian and U.S. operations for $6.3 billion. Almost two years later in 2012, TD acquired the U.S. credit card portfolio of Target Corporation (NYSE:TGT).

The acquisition which really set TD on its U.S. growth trajectory was its 2005 acquisition of 51% of the shares for Banknorth. This $3.8 billion transaction opened the floodgates for further growth.

From a branch perspective, TD has been targeting deposit-rich areas such as Florida. TD acquired three Florida banks in 2010 in an FDIC-assisted transaction which saw the bank's store presence jump from 34 to 103 at the time. It has continued building on its territory following this move and TD currently has more branches in the U.S. than it does in Canada.

TD has increased its dividend at a ~12% CAGR over the past two decades. Since holding steady through the crisis as its peers did, it has been back to consistent increases.

Bank of Nova Scotia

BNS is Canada's third largest bank by market capitalization. The bank operates in over 55 countries with over 21 million customers. It has four lines of businesses; Canadian Banking, International Banking, Global Wealth & Insurance, and Global Banking & Markets, highlighting the importance of its foreign operations.

BNS is the most unique of the Banks relative to its peer group. It has established itself as an international player. Its global wealth management platform saw YOY growth from Q1 2014 to Q1 2015 of 13%. In terms of average assets by geography, the bank holds (in billions CAD) $470 in Canada, $117 in the U.S., with $196 International.

Under its ScotiaMocatta business, BNS operates as one the world's top bullion dealers with business ranging from physical metal distribution to precious and base metals trading. I believe this line of business will become more important over time as retail investors become increasingly involved in the precious metals trade. Commissions have long been prohibitive for smaller investors, but with increased global demand, I expect this side of operations to expand its volume.

In late 2012, BNS completed its acquisition of then-ING DIRECT Canada which has since been rebranded to "Tangerine". This online bank is one of the most respected operators in the industry and has ~2 million customers. This acquisition has positioned BNS to leverage an established online operator with proven success and I believe the overall positive synergies will continue to be had for years to come. Further, BNS is recognized as the best corporate/institutional internet bank in 16 international markets.

Over the past few years, BNS has increased its dividend twice annually; in the second and fourth quarters. The bank has paid shareholders dividends every year since inception in 1832. Increases have come in 43 of the past 45 years.

Bank of Montreal

Coming in fourth position, BMO is the oldest of the Banks. It was founded in 1817 initially in Montreal, Quebec, where it still maintains its legal corporate head office.

The company derives a diversified set of revenue streams from four business segments; Canadian Personal and Commercial Banking (38%), BMO Capital Markets (22%), Wealth Management (22%), and U.S. Personal and Commercial Banking (18%).

BMO has been doing business in the United States as far back as the 1800s. It currently operates in the U.S. as BMO Harris Bank. This investment has resulted in a +600 branch network situated for the most part through the Midwest U.S., though it has operations elsewhere including Florida.

One of BMO's lesser known foreign investments involves its Chinese operations. From 1996 when BMO became the first Canadian bank to receive a license for a full-service branch in Beijing, the company has continued to invest in fund management, derivatives, and foreign exchange operations in China.

In 2012, BMO initiated a stake in COFCO Trust Co. for just under 20% of the company. COFCO has significant operations in China and gives BMO a foot in the door to building a name for itself in the emerging Chinese market with affluent and institutional clientele. While this currently represents a tiny portion of BMO's overall business, it is worth noting as a potential harbinger of things to come.

On the whole, BMO's profile as a bank is Canadian and U.S., with a significant and growing taste for building its Chinese franchise. It also has a presence in a number of other markets around the world which are less notable.

BMO has paid dividends consecutively since 1829. However, its dividend growth has struggled through the crisis. The annual dividend was held constant from 2009 through 2012 at rate of $2.80 CAD. Since then it has grown slightly to what would amount to a payment of $3.20 CAD on the current quarterly dividend of $0.80 CAD.

Canadian Imperial Bank of Commerce

CM rounds out the Big Five listing of Canadian banks. It operates in three main lines of business; Retail and Business Banking, Wealth Management, and Wholesale Banking.

CM has received accolades in recent years which delineate it as one of the most solid banks around. It was recognized by Bloomberg Markets as the strongest publicly traded major bank. Given the bank's conservatism, I often think of it as the "most Canadian bank".

While CM has established itself as a quality Canadian firm, I believe the biggest risk for it going forward would be underperforming its peers based on an inability to grow outward. It provides solid risk-adjusted returns by not betting the farm on expansion, but the opportunity cost of not capitalizing on its strength may leave it further behind the competition in years to come.

Having noted the above, CM does have international operations in foreign markets such as the Caribbean, London, and Hong Kong. It completed its acquisition of Atlantic Trust this past year which is a U.S. private wealth management business. While I expect CM to have tempered growth in foreign markets going forward, it may be some time before it moves beyond being a largely Canadian player.

CM has paid dividends consecutively since 1868. Since 2002 the company has achieved a CAGR of over 7%.

Boiling It Down

On the whole, it is apparent that the business-lines of the Banks crisscross in many areas.

RY is the current leader with TD challenging it for the top spot in terms of size. TD's market capitalization did pass RY briefly in 2011 and it continues to pose a threat. TD has also set itself apart in terms of customer service in Canada which enables it to build market share in an industry where products are very similar between competitors.

Of the group, I believe that TD is currently best positioned to capitalize on U.S. growth. It has the clearest path to achieve this objective. It has been targeting high-deposit areas and creating a seamless banking experience for Canadians "Snowbirds" who travel frequently to the U.S..

While BMO has sizeable foreign operations beyond the U.S. where TD is leading the Canadian players, I believe BNS is in the best position when considering global growth scenarios. BNS has leveraged its Canadian strength to invest elsewhere and has done so effectively.

When it comes down to it, each of the Banks do indeed have solid operations in Canada. The real story will be how the world develops over the coming decades. Those who are able to branch out beyond their home market will see their fortunes materially improve. I anticipate that the Banks of twenty years from now will be quite different than what we see today.

Banks Differentiating Factors
RY Leading Canadian franchise in terms of market cap. Has struggled with U.S. expansion.
TD Top rank for customer service. Best U.S. growth portfolio.
BNS Most international of the banks. Canada's gold bank.
BMO Solid Canadian franchise with Chinese growth potential.
CM Durable Canadian franchise.


Canada has long been able to trust in its financial system. This has formed the basis for the rest of the economic growth the country has seen over the years. As we have seen, the Banks have dividend histories dating back to the 1800s, establishing them with some of the longest streaks in the world.

Although there is a fair amount of overlap between the Banks, this article has demonstrated the various ways they differ. As an investor, this offers the opportunity to either sharp-shoot one to two of the banks or simply invest in them all through a fund to bet on the overall upside of the Canadian financials industry.

While over the years the Banks have attempted a number of mergers with one another, there are regulatory concerns with regard to how large the combined institutions would be. Consequently, the banks are likely to remain on their own for at least the foreseeable future.

As noted in the disclosure, I personally hold TD and CM (where I worked for a period of time) while my brother holds RY and BNS. We share many views, though this is one of the areas where we each have very distinct opinions. I prefer the huge U.S. expansion growth for TD and strong Canadian retail franchise for CM while he enjoys RY's size in Canada with BNS's incredible international portfolio.

While there are various ways to invest in Canadian financials, they each deserve individualized investment analysis as they do differ in many significant respects.

Disclosure: The author is long TD, CM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My positions are on Canadian Exchanges in CAD. My brother is Long RY, BNS.