On days like these, when markets are volatile, I can find solace in happy childhood memories: cross country skiing, cycling, road trips – and the steadiness of Canadian banks.
So, I am the son of a banker.
I grew up around the industry, and my first professional job in my 20s was with a Canadian bank. In fact, before I joined MD about 20 years ago, I spent more than a decade of my career in that world.
The peace-of-mind banks bring me isn't nostalgia. It's recognition that, through thick and thin, Canadian banks have shown an ability to produce a reasonable return on investment equity.
Not stellar. Not fast-growing. But stable and there for the long haul. Just the kind of thing to help keep a portfolio steady through every market cycle.
Banks stocks: you just can't quit them
From an investment perspective, banks are vitally important to Canadians and their ability to meet their financial goals. The banking industry accounts for almost a quarter of Canada's equity market and about 3.3% of our GDP. Financials also make up a significant part (11.7%) of the domestic investment grade bond universe. Canadian banks employ more than 275,000 Canadians, located in every city and town across the country.
At MD, just about all of our client portfolios have meaningful exposure to Canadian banks, within both stock and bond allocations.
Regulations help keep lid on capital risks
The Canadian banking industry is highly regulated to be risk averse. Limited competition among a small number of strong players – known as an oligopoly – means Canadian banks can focus on preserving and growing capital and profits, rather than knocking out their competitors at all cost.
Unlike banks in the U.S. or in Europe, driven by winner-takes-all stakes and an ability to take risks, Canadian banks reward investors as good stewards of capital, and have consistently generated a return on equity in the high single-digits or low double-digits.
Canada's unique regulatory climate is nicely described as “social capitalism" by our sub-advisor John Goldsmith, head of Canadian equities at Montrusco Bolton Investments Inc. We like our banks to be profitable but not too profitable, with a public expectation for regulators to step in to restrain outsized margins.
Even when earnings are flat, investors see dividends
At any given time, one or another bank's stock may be priced more or less favourably, but all Big Six have increased their dividends, essentially nonstop, for decades.
Consider that the longest-running, dividend paying company in Canada is our oldest bank: Bank of Montreal has paid dividends steadily since 1829.
Investors who focus on growth stocks and ignore dividend-paying stocks may see underperformance in their portfolios over time. Over the last 30 years, Canadian markets have returned an average annual return of about 7% and dividends represent about 2% of that.
Not my father's banking industry
While they may seem old school, Canadian banks have invested heavily in innovation and distribution. The largest six banks have spent more than $84.5 billion on technology over the past decade. Two thirds of Canadians now do most of their banking online or electronically. It's a very different industry from the one I grew up around.
This isn't the most exciting stock story in the news today, and that's my point. Banks generally aren't going to rally on speculation, so you won't triple your money in a short time. I expect them to continue to trade within a relatively tight range, unlike a high tech flyer or FAANG stock.
So, while we look forward for this recent bout of stock market volatility to settle down and remain optimistic for 2019, I rest easy knowing a large portion of our client assets are invested in the kinds of stocks and portfolios designed to perform though the entire market cycle.