The Big 5 Canadian Banks have a track record of rewarding long-term investors despite continually changing industry, business, and economic environments.
- The Big 5 Canadian banks have recently released their Q1 2019 results and have reiterated that business conditions are challenging.
- Short sellers who have renewed their Big 5 bets in early 2019 are currently paying a high price following the rapid increase in share prices subsequent to mid-December lows.
- The Big 5 are currently reasonably valued and represent solid investments for investors with a long-term investment time horizon and who desire an increasing stream of dividend income.
NOTE: The Big 5 Schedule 1 Canadian Banks are listed on the TSX and NYSE. All figures reflected in this article are in CDN $ and I have used the March 8, 2019 closing share prices.
The following Big 5 Schedule 1 banks in Canada have long been a favorite investment for many investors seeking safety, income, and growth.
- The Bank of Montreal (BMO)
- The Bank of Nova Scotia (BNS)
- The Canadian Imperial Bank of Commerce (CM)
- The Royal Bank of Canada (RY)
- The Toronto-Dominion Bank (TD)
I have written articles in which I have focused exclusively on one Schedule 1 bank. This article, however, touches upon all 5.
My reason for writing this article is that:
- They all recently released their Q1 2019 results while I was on vacation;
- In my A Great Investment Portfolio Example of Diversification article I disclosed that the value of my Big 5 holdings make up ~16.4% of my total holdings. I, naturally, take a great deal of interest in what is happening with these banks.
Before going further, I recognize some readers may find my exposure to this industry to be somewhat excessive. If so, consider a Financial Freedom is a Journey subscriber who is a former senior executive of one of the Big 5, holds in excess of 45% of his total equity investments in one of the Big 5! A condition of his appointment at the bank was a requirement to hold 3 times his salary in common shares; this was separate from option grants.
In the years he served with the bank, the option grants were quite generous. He bought some of them to hold and used the gain on some of them to buy the options. While capital growth is something for his children to appreciate, dividend income is now his/his wife’s dominant source of retirement income.
This subscriber’s 2nd largest holding? Another of the Big 5 which constitutes ~5.67% of his overall portfolio.
I fully appreciate not everyone reading this would feel comfortable with these levels of portfolio concentration and would counter with the argument that it is important to spread your money across a variety of stocks or asset classes to protect yourself from risk. Heck, I have stumbled across a blog where the writer discloses a portfolio value of a few hundred thousand dollars scattered over 100+ stocks! This strikes me as throwing mud against the wall.
I am not here to disparage another’s investment style but I draw to your attention the following:
“Behold, the fool saith, 'Put not all thine eggs in the one basket.' 'Scatter your money and your attention'. The wise man, however, says "Put all your eggs in the one basket and - WATCH THAT BASKET ."
― Mark Twain, Pudd'nhead Wilson
Some of the world's best investors talk about the virtues of holding concentrated positions. Warren Buffett, for example, is of the opinion that 'Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.'
I know my limitations and can categorically say that I could not possibly pay enough attention to a broad spectrum of stocks in a variety of industries and/or asset classes. As a result, ~16.4% of my overall investments is in companies in an industry in which I:
- was employed throughout my career;
- am interested;
- am rewarded with a steadily increasing stream of dividend income;
- have the opportunity to benefit from capital growth;
- know risk mitigation is part of each bank’s DNA.
While the Big 5 have rewarded me extremely well, I am fully cognizant that stuff can happen so I pay attention to what could derail these banks. I, therefore, will never forget what happened to the global banking system during The Financial Crisis.
I distinctly remember that timeframe because I worked in an area of one of the Big 5 where we interacted with companies/banks within the financial sector on a global basis. Times were REALLY not good for foreign banks. In fact, times were not good for the Big 5. Relative to foreign banks, however, the Big 5 banks were a safe haven. Yes…the share prices tanked and they each froze their respective dividends but at least they didn’t slash their dividend and run to the government for financial assistance. THAT increased my comfort level in the Big 5.
Short-Selling Canadian Banks
Lately, short sellers have been increasing their short positions in the Big 5; details on short-selling activity are provided twice a month and data can be accessed at the Investment Industry Regulatory Organization of Canada website.
Subsequent to just before Christmas 2018, the share price of each of the Big 5 has been on an upward trajectory which suggests some short-sellers might not be faring so well with their calls.
Having said this, the banks face a number of headwinds and on the recent Q1 conference calls with analysts, senior management at each of the Big 5 indicated they ‘continue to see market volatility due to greater vulnerability to the macroeconomic outlook stemming from trade tensions, geopolitical uncertainty and revisions to global growth forecasts to the downside.’
With some unfavourable changes in near-term macroeconomic variables (eg. equity markets, oil prices, Brexit, US/China trade negotiations, unemployment rates, etc.) it would not surprise me if we witnessed a pull back in the share price of the Big 5 before mid-year. Short-sellers with deep pockets and the intestinal fortitude to stick with their positions will likely profit from their positions. (NOTE: I think there will be a broad market pullback within the next 6 – 12 months.)
I provide links to the Economic Research segment of each of the Big 5 where you can read their respective summary of recent economic events and what to expect in the weeks ahead.
As noted above, many Big 5 short-sellers have experienced challenges to date. I do not, however, think it is unreasonable for us to witness softer Big 5 stocks prices within the next 6 – 12 months as a result of:
- The narrowing spread between what banks earn on assets (ie. loans) and liabilities (ie. deposits);
- More stringent mortgage regulations which have made it increasingly difficult for consumers to qualify for mortgages;
- Struggles to develop pipelines and other crucial infrastructure for the energy sector;
- An extremely challenging global geopolitical environment.
Despite these short-term challenges, I am long-term bullish on the Big 5. I provide links to reasonably recent interviews conducted by a couple of the CEOs from the Big 5 I thought you might find to be of interest.
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I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long BMO, BNS, CM, RY, and TD.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.