Skip to main content
Canada’s most-awarded newsroom for a reason
Enjoy unlimited digital access
$1.99
per week
for 24 weeks
Canada’s most-awarded newsroom for a reason
$1.99
per week
for 24 weeks
// //

Despite occasional setbacks, Canadian banks have a long track record of generating shareholder wealth.

Fred Lum/The Globe and Mail

Canadian banks have withstood the recent selloff in financial stocks relatively well, but are still underperformers by domestic standards.

In the first half of this year, the Canadian bank index rose by 7.8 per cent on a total return basis, Sohrab Movahedi, an analyst at BMO Nesbitt Burns, said in a note.

"All the Canadian banks, relative to their global brethren, are in a thin minority with positive year-to-date returns," he said.

Story continues below advertisement

But the bank index is also trailing the broader S&P/TSX composite index by about 200 basis points over the last six months.

And the balance of probabilities would suggest that investors should be selective among the Canadian banks over the remainder of the year, Mr. Movahedi said.

Since 1970, the bank index has fallen short of the broader market in the first half of the year exactly half of the time. That underperformance then extended into the second half of the year also about half the time, suggesting that Canadian investors are facing even odds strictly by historical standards.

But history also suggests the margin of potential underperformance is greater than the potential upside, judging by years that started in a similar way to 2016, Mr. Movahedi said.

"The Canadian bank index 'expected' return profile, albeit based on historical performance, suggests a skew to the downside in the second half of calendar 2016 and argues in favour of individual bank stock selection."

One stock-picking method that has a strong track record is mean reversion – buying last year's worst-performing Canadian bank stock and selling the top performer.

Since 2000, that method has generated an average annual positive return of 27 per cent per year, Mr. Movahedi said. And this year is shaping up to be a confirmation of the pattern.

Story continues below advertisement

The two biggest laggards among the Big Six bank last year were National Bank Canada and Bank of Nova Scotia. This year so far, they are the best of the group, having generated total return of 12.4 per cent and 15.7 per cent respectively.

Meanwhile, Toronto-Dominion Bank has gone from first to worst with a total return of 4.3 per cent year to date.

There is, however, a caveat. The valuation spread between the more richly valued Canadian bank stocks and their cheaper counterparts has been shrinking in recent months. And when spreads decline below long-term average, that's a trend that historically has been persistent, Mr. Movahedi said.

In that kind of environment, portfolio management may require some qualitative comparison.

"In this regard, the differences in strategy and platforms, as well as track record in capital management become increasingly relevant," Mr. Movahedi said.

By those criteria, his top picks among the big banks are Bank of Nova Scotia and Toronto-Dominion Bank.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies