# The Great Canadian Bank Debate



## Killer Z (Oct 25, 2013)

Forgive me if a thread such as this one has previously been created. I searched the forums and could not find one.

My portfolio is well diversified, however unlike most investors, I find myself currently lacking in Canadian financial institutions. I currently have approx. $30,000 available in my TFSA that I wish to invest into Canadian financial institutions. I plan to then sprinkle half of my annual TFSA contribution toward this position each year (i.e. approx. $2,750 next year).

It appears I have a few options:

*1) Direct Exposure (all banks): * I can simply start positions in the Big 5, and slowly add to them moving forward. I would likely purchase in two tranches per year to benefit from some level of dollar cost averaging. High transaction costs, but well diversified.

*2) Direct Exposure (1-2 banks): *I can choose 1 or 2 of the Big 5, start positions, and slowly add to them moving forward (perhaps BNS and TD). This would allow me to achieve the ability to DRIP much faster I would once again likely purchase in two tranches per year to benefit from some level of dollar cost averaging. Lower transaction costs than Option #1, but not as well diversified.

*3) ETF Exposure:* I could purchase a Cdn Fin ETF such as any of these:

BMO Equal-Weight Banks (ZEB) 
iShares S&P/TSX Capped Financials (XFN) 
iShares Equal-Weight Bank and Lifeco (CEW) 
BMO Covered-Call Banks (ZWB)
Horizons Enhanced Income Financials (HEF)

Downside are the MERs with the ETFs, the upside is the instant diversification and faster ability to DRIP.

Would love to hear the thoughts of the CMF brain trust. I am currently leaning towards Option #2. Thanks in advance!


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## fatcat (Nov 11, 2009)

i had ZEB (because i like equal weighting and it is pure banks) and then decided that i would go with 3 banks BMO, TD, RY
i save the mer, which is not insubstantial, .55 i think
and i am pretty sure i track close to ZEB though am to lazy too bother checking

unfortunately you have too many options with our banks
i would avoid the options added etf's myself 

if you want to add option value perhaps pie will give some help on how to do it yourself ...


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## underemployedactor (Oct 22, 2011)

In your post you mention you just want banks, but XFN,CEW,HEF have Lifecos as well. If you want the broader diversification that includes Lifecos, then any of those three are decent choices, I think. But if you just want the big Canadian banks, I don't see any point in paying management fees to buy only 5 or 6 companies. Just buy the individual issues. You could buy board lots of each of the major Canadian Banks for your 30K. I would stay away from ZWB.


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## OptsyEagle (Nov 29, 2009)

Buying all 5 banks is the least risky. If you attempt to choose the best, even if you are right, if others are doing this as well (and you can be sure they are) you will most likely be overpaying for their good attributes. If you choose wrong, well you're wrong.

If you buy all 5 you will benefit from the overall growth in the Cdn. banking sector and the good news is that you will be pretty much immune to any overall banking problems, since if ALL the banks misstep, they will simply raise their fees and net interest margins together, to recoup any lost money, very quickly. If only one bank missteps, at least it won't be 1/2 of your banking portfolio.

Anyway, those are my thoughts. The more you speculate ... the more mistakes you will make.


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## doctrine (Sep 30, 2011)

I would agree to diversify over at least 3 of the big 6 if not all.


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## humble_pie (Jun 7, 2009)

Killer Z said:


> ... [option 2] I can choose 1 or 2 of the Big 5, start positions, and slowly add to them moving forward (perhaps BNS and TD). This would allow me to achieve the ability to DRIP much faster I would once again likely purchase in two tranches per year to benefit from some level of dollar cost averaging.
> 
> I am currently leaning towards Option #2



oddly enough it's also the option i'd lean towards myself, although it's possible the consensus here will weigh up against this choice.

the caveat is that canadian banks are dizzyingly high. You have read the bearish warnings i imagine? they are everywhere, both here & all over the media. The world could collapse, cry the doomsayers. Canadian banks are poorly capitalized, they say. Too much has been loaned to mortgage holders with CMHC insurance. Deck of cards. Pouf.

another warning might be the fact that you don't hold any financial institutions yet. There must be a reason for this, something must have held you back. Because otherwise it's hard not to bump into at least some of the big 5, if not in one's own investment accounts then perhaps through one's pension holdings (banks could be disguised inside a fund inside a pension plan, but they will be present, one can almost guarantee.)

so perhaps the reason(s) why you avoided bank shares in the past should be consulted again. There could be merit there.

another thing to consider would be the time frame. Do you have plans to withdraw from the TFSA during the next several years, for any reason? such plans could mean a more liquid tax-free portfolio. Banks are like fine wines imho, they do well just left in cellars for years & years, even for a lifetime.

re the number of banks to hold: for me the magic number is three, no more. The reason is that they are all very competitive. If one bank falls behind in, say, investment banking in the US, or retail business in canada, it is nearly always going to mend its ways & catch up, although it will likely only be able to turn gradually & slowly, like a giant steamship changing direction in mid-ocean. This feature also reinforces the benefits of ultra-long-term investing when it comes to canadian banks.

for example, a few years back royal was the big-bank-that-couldn't. At that same time, the TD was everybody's favourite. But at the present moment, one could almost say these views are being reversed.

you also mention the benefit of being able to commence DRIPPing much earlier with just a couple of bank holdings. Yes, this is an important insight imho.

as for scaling in with 2 DCA purchases per bank per annum, one shouldn't worry about the costs here. Especially now that 2 brokers are down to $9.99 flat rate commissions while the other 4 will surely have to follow. Two (2) banks x 2 purchases = $40 per annum. This is so much less than the MER plus the TER for a bank or financial ETF; on 30k these would run north of $165, would they not?

one more thing, if i may: please stay away from covered call etfs.


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## fatcat (Nov 11, 2009)

doctrine said:


> I would agree to diversify over at least 3 of the big 6 if not all.


fair enough, i think over time 3 will do you fine especially if you pick the best 3 
i like td,ry and bmo myself

i am in penny pinching mode if we just limp along for several years, the .55 is just skimmed off the top
though i think ZEB is a fine choice

View attachment 418


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## Nemo2 (Mar 1, 2012)

fatcat said:


> i like td,ry and bmo myself


We hold BNS, TD & RY.....for some reason(s) long forgotten, but the residuals of which, rightly or wrongly, stay with me, (perhaps because I held accounts with them and was dissatisfied), I've never cared for CM or BMO.


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## Oldroe (Sep 18, 2009)

If you look at the 5 banks daily chart they will pretty much be the same. Every so often 1 will be lower and you will read all these reports about this and that and how bad.

Buy Buy Buy and in 3-6 months you will be smart smart smart. Then another bank will be on the s...t list and you buy buy buy and that's how we own all 5 banks.


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## marina628 (Dec 14, 2010)

I have CM,TD AND BNS for about 15 years on average and these are kind of stocks you hold for life and collect dividends to help pay for the nursing home ,at least my plan.I did buy my first RY stock in 2012 and National Bank in 2013.My investment accounts have close to 23% in Canadian Bank stocks now but that is not advise I will give to anyone else.


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## Killer Z (Oct 25, 2013)

Thank you for all the terrific feedback. I have decided to start positions in RY, TD and BNS in two to three tranches throughout 2014. At $6.95 per trade (CIBC Investor's Edge), it's fairly inexpensive. I am certainly not opposed to owning all the banks, however my focus at this time is to get these three DRIPing prior to diversifying further.


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## Killer Z (Oct 25, 2013)

An interesting article in the Financial Post:

http://business.financialpost.com/2014/07/15/how-canadas-big-five-banks-have-become-the-big-three/

Coincidentally BNS, TD and RBC are the three banks I chose.


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## MrMatt (Dec 21, 2011)

TD is by far my first choice.
BNS second, and really you don't need a third


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## avrex (Nov 14, 2010)

Good work Killer Z. I would not be afraid to add more to any bank positions.

I think the Canadian Banking Industry group as a whole, currently represents good value.
(i.e. much better value than the Canadian Material and Energy sectors)

My first choice at the moment is Bank of Nova Scotia (BNS.TO)

I also have a position in the 6th bank (i.e. not part of the Big 5), National Bank (NA.TO), which I feel is undervalued.


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## Nemo2 (Mar 1, 2012)

Killer Z said:


> Coincidentally BNS, TD and RBC are the three banks I chose.


Likewise.


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## My Own Advisor (Sep 24, 2012)

Own the big six and happy to do so  If I was just starting to invest, BNS.


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## Islenska (May 4, 2011)

Foolishly I took profits from TD about 4 years ago, but redeemed myself with a load of BNS since then
Canadian banks still seem to be in the gold standard area and are doing some low ball buying with their rosy capital stash

Tough to buy here though as they are priced to the sky!


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## Oldroe (Sep 18, 2009)

Most well half our 5 bank holdings we've had for 25 years.

If I was starting today just buy over the next year with available funds. Always have some cash available for quick purchases. One of the many reason I stopped dripping.

I just took a quick look at G&M charts and all 5 banks are tracking about the same so chose what you like. I do this every couple weeks and if 1 bank price is going down and the rest look the same I buy the dog if I can lower my avg. cost. 

The last time I bought was Royal at a 25% discount every 5 cent analysis was yapping this bad that bad in 3 months me good.


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## avrex (Nov 14, 2010)

On Friday Standard & Poor's revised down the outlook on Canada's big six banks to Negative.

The market yawned.


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## My Own Advisor (Sep 24, 2012)

avrex said:


> On Friday Standard & Poor's revised down the outlook on Canada's big six banks to Negative.
> 
> The market yawned.


"The agency said it is revising its outlook on Royal Bank of Canada , Toronto-Dominion Bank , The Bank of Nova Scotia , Bank of Montreal , Canadian Imperial Bank of Commerce and National Bank of Canada to "negative" from "stable.""

Bad news is good news for investors, perfect


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## gibor365 (Apr 1, 2011)

My Own Advisor said:


> Own the big six and happy to do so


Same here, during last 3 years bought at different points in time different banks in different accounts.... also positions in each of them is pretty close, so I'm kinda replicate ZEB 
Lookig back, usually the bank that performed the worst in one specific year, will perform the best in another year.... thus just add to banks that on dips...


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## My Own Advisor (Sep 24, 2012)

Most of them DRIPping, turned off a few DRIP taps with rising prices over the last year. Looking forward to more dividend hikes in 2015.


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## ashin1 (Mar 22, 2014)

DRIPping with National bank of Canada and TD, couldn't be happier. Canadian banks are awesome!


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## My Own Advisor (Sep 24, 2012)

Agreed! And pipelines and utilities too!


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## ashin1 (Mar 22, 2014)

My Own Advisor said:


> Agreed! And pipelines and utilities too!


Dripping with inter pipeline and about 15 shares away from being able to DRIP with Enbridge

Canada has some pretty awesome companies

Can't wait to dip my toes in American companies!


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## gibor365 (Apr 1, 2011)

One more comment about banks.... I know that many on this forum doesn't like CIBC... but imho it's one of the best banks in Canada....now they first who doing nice move - special package for new immigrants that include no-fees for 1st year, Credit card without Canadian credit history and so on.... Considering that every year to Canada coming about 300,000 immigrants it can be very beneficial for a bank.... I just remember when we came to Canada in 1999...we brough triple digits cash in CAD/US, my wife was working from day 1 and had very nice pay cheque....still neighter BNS nor TD allowed us to get credit card....


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## Pluto (Sep 12, 2013)

don't get me wrong, I like the banks, but not at these prices....buy when they are on the operating table, then buy more on margin when they are in the recovery room.


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## doctrine (Sep 30, 2011)

Banks are all great but are at or slightly above historical average valuations, so I wouldn't be adding, except possibly to National Bank (NA.TO), or one of the smaller banks, but it's definitely not worth selling either.

Looking back to 2011-12, I was buying BMO below $60 (now almost $80), CIBC in the low $70's (now $100), and Royal Bank as low as $47 (now almost $80). I don't think those prices will be seen again, but the yields they then could come back. 5% is a good yield to buy Cdn banks at.


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## Killer Z (Oct 25, 2013)

Bank stocks for me are a form of investment that I plan to contribute to twice a year regardless of the prices. I'm basically DCAing towards retirement with them (25-30 year span). If I see a pullback and am due for a purchase I will make one, otherwise I will simply buy my quota and move on.


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## Pluto (Sep 12, 2013)

doctrine said:


> Banks are all great but are at or slightly above historical average valuations, so I wouldn't be adding, except possibly to National Bank (NA.TO), or one of the smaller banks, but it's definitely not worth selling either.
> 
> Looking back to 2011-12, I was buying BMO below $60 (now almost $80), CIBC in the low $70's (now $100), and Royal Bank as low as $47 (now almost $80). I don't think those prices will be seen again, but the yields they then could come back. 5% is a good yield to buy Cdn banks at.


Well, I wouldn't want to try and talk anyone into selling. This is just not a great buying opportunity. In 2009 the yield on RY was briefly, 7.8. BMO yield was briefly 11.6. CIBC was briefly 9.53. RY fell 60% from its 2007 high to 2009 low. 
Of course, 2009 was exceptional and banking was highly suspect. So supposing one assumes a 30% decline next time the sky falls, that would put RY yield at about 5%. So I'll go with your 5% yield as a decent entry point....


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## cannew (Jun 19, 2011)

Own 5 Cdn banks and my average yield on my investment is around 6%. Never sell any but keep looking to add when and if the price drops. Set up bns drip's for grandkids back in 2008 before the drop. Even with the crisis they have averaged 12.5% annually and their yield is 5%. I also posted the dividend history of bns, check it out.


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## Pluto (Sep 12, 2013)

cannew said:


> Own 5 Cdn banks and my average yield on my investment is around 6%. Never sell any but keep looking to add when and if the price drops. Set up bns drip's for grandkids back in 2008 before the drop. Even with the crisis they have averaged 12.5% annually and their yield is 5%. I also posted the dividend history of bns, check it out.


I'm glad you are happy. I still like buying them when they are depressed - I get more shares and a higher yield which makes up for waiting. At least you bought quality, that's what saved you.


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## cannew (Jun 19, 2011)

Pluto said:


> I'm glad you are happy. I still like buying them when they are depressed - I get more shares and a higher yield which makes up for waiting. At least you bought quality, that's what saved you.


Agree 100%, the price you pay can have a huge affect on future returns.


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## Synergy (Mar 18, 2013)

Solid results from National Bank today. Share price up 2.5%. Looking to add a 3rd back to my portfolio - currently holding TD & NA. Looking at RY & BNS, leaning towards RY.



> National Bank, Canada's sixth largest bank, has reported a third-quarter net income of $441 million, up 10 per cent from the same quarter last year as the bank was helped by growth in its wealth management and financial markets services.


source: http://www.cbc.ca/news/business/national-bank-profit-up-10-1.2748123


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## ashin1 (Mar 22, 2014)

Synergy said:


> Solid results from National Bank today. Share price up 2.5%. Looking to add a 3rd back to my portfolio - currently holding TD & NA. Looking at RY & BNS, leaning towards RY.
> 
> 
> +1


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## doctrine (Sep 30, 2011)

NA still the cheapest of the big 6 banks by nearly 20%. Payout ratio for the quarter was just 40%, whereas most of the big 5 are at 47-48%. Same yield as BMO and CIBC, but with the dividend growth of RY, TD and BNS, and a lower payout ratio than all of them.


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## My Own Advisor (Sep 24, 2012)

Agreed, NA is cheap. Lots of room to rise....

Happy to own 7 banks, they are perpetual money machines.


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## cashinstinct (Apr 4, 2009)

Banque Laurentienne / Laurentian Bank (LB) down 3% today, results dissapoint it seems...


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## gibor365 (Apr 1, 2011)

CIBC results a bit week 
o	EPS, Canadian Imperial Bank misses by $0.02, revenue in-line
o	FQ3 adjusted net income of $908M or $2.23 vs. $931M and $2.26 one year ago.
o	Announces plan to seek approval to buy back up to 8M shares or 2% of the float over the next year.
o	Retail and Business Banking adjusted net income of $597M off 5% from a year ago.
o	Wealth Management net income of $121M up 19%, as AUM grew thanks to market appreciation.
o	Wholesale Banking adjusted net income of $254M up 11%.


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## ashin1 (Mar 22, 2014)

NA looking strong today!


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## dime (Jun 20, 2013)

Interesting thread! I've been debating this in my head as well.

I had a large portion of my portfolio in XFN for many years since the crash and it's done rather well. It was looking super toppy so I sold it earlier at the peak (just before it dropped slightly down 3% but has since recovered.) But rather than just buy it back I started thinking I might want to try and pick the better stocks of the group that are expected to outperform. I like the idea of being able to exit an individual stock if the ratings drop on it. 

Also the MER of 0.6% doesn't seem like much but it adds up every year, expecially with larger sized amounts in it. For the millionares, that means if you have a tenth of your portfolio in XFN, you're paying $600 a year told hold XFN. That would cover comissions for buying and selling 30 stocks every year! 

Entering and exiting a position on XFN is much easier than managing individual stocks. The diversification of XFN is good with the 27 holdings it has, but consider that 80% of the weight of the fund is from it's largest 7 holdings alone (RY, TD, BNS, BMO, CM, MFC, SLF)

I also sold NA because it was recently downgraded to a 'Hold' rating and I wanted to lock in the gains (I may buy it back later if the price is right)

Firstcall from Thomson Reuters gives a buy rating to RY, TD, BNS, CM where BMO is a hold for some reason. All rated four stars by S&P. CM has the lower net profit margin of them but the highest yield. The long term growth estimates from highest to lowest are TD, BNS, RY, BMO and CM. The average for the group is about 10% EPS growth.


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