What are we looking for?
The best way to pick Canadian bank stocks. Choosing among five look-alike financial institutions can be a challenge, but history provides some clues about the best way to spot potential winners.
How we did it
Craig McGee, senior consultant at Morningstar Canada, ran several "backtest" simulations to see how various ways of picking among the Big Five bank stocks would have fared over past decades. You can see the results in the accompanying table.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its investment research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.
What we found
Mr. McGee's results show that since 1985 investors would have done best by picking the Big Five bank with the lowest market capitalization every quarter (see table below). This simple strategy would have generated an average annual total return of 19.7 per cent. Picking the bank with the worst one-year return or the lowest price-to-book ratio would also have produced exceptional results.
You should note that all the big banks fared unusually well over this period. An investor who simply bought an equally weighted portfolio of all five financial giants on Dec. 31, 1985, and rebalanced every quarter until July 31, 2012, would have reaped an annualized total return of 14.1 per cent. That is far ahead of the 8.0 per cent annualized payoff from the S&P/TSX Composite Total Return Index over the same period.
If history is our guide, Canadian Imperial Bank of Commerce is the stock to buy now, because of the bank's low market cap. Also worth noting is Bank of Montreal, which has the next lowest market cap, as well as a low price-to-book ratio and a low trailing return.
How strategies compare (annualized returns)
Lowest market cap
Lowest 1 yr total return
Lowest price to book ratio
Highest dividend yield
Lowest price to earnings ratio
Highest expected yr/yr earn. grwth
Highest trailing yr/yr earn. growth
Highest latest earnings surprise
Highest return on equity
Highest market cap
Highest earn. estim. revis. / 3 mo.
Highest 1 yr total return
Big Five banks equally weighted
S&P/TSX Total Return Index