Behold! The Glory of Canadian Banks

For the entirety of my soon-to-be sixteenth year working in finance, there is no phrase I’ve heard more often than, “I just want to own the banks." This phrase often comes from clients who were born between 1946 and 1964 (i.e., Boomers).

Their reasons are sound:

• They’ve paid dividends to their shareholders without interruption since inception. That means they’ve paid dividends through two global pandemics, World War I, the Great Depression, World War II, the 70s, the Tech Crash, and the Great Financial Crisis.
• When considering all five together, their share prices, split adjusted, have grown at almost 9%/year with dividends reinvested for more than 125 years.
• They are an oligopoly (some might even say cartel) who work together to ensure their shareholders are happy. And when competition appears, it doesn’t stick around. It gets bought or sued.

To sum it up: they’ve always paid dividends; they’ve compounded at nearly 9% a year with those dividends reinvested; and they protect their turf like a pride of lions, buying, beating, or burying challengers (I mean, RBC’s logo is a golden lion, after all).

Not bad, right?

Well, there are tons of issues with owning nothing but Canadian banks.

First, you are hyper-concentrated. And don’t say, “but I own five banks, Vince!” You own a small portion of the Canadian market, and the Canadian market contributes just over 2.5% to the global market. You are hyper-concentrated.

Second, you are heavily exposed to Canadian housing and Canadian debt. We are a heavily indebted nation, and it’s been getting worse for awhile now. The Canadian consumer can only be squeezed so much.

Third, it only takes one populist government to decide banks are too profitable.

Fourth, expansion out of Canada is risky. Look at Scotia’s blunder in Central America. TD, RBC, and BMO’s expansions into America will continue to run into political pressure.

Fifth, technology. Fintechs build apps that are smooth, intuitive, and beautiful, while most bank apps still look and feel like 2002.

History makes the banks look invincible. And maybe they are. But the future is less certain. It always is. Concentration has always looked safe, right up until it hasn’t. Diversification is the only real protection, which is why I would rather you own the TSX, or better yet, the world.