Ranking Banking
So today, I'll try not to ramble too much (unbelievable I know... don't worry I'll probably fail) and focus on the results I got when trying to figure this out. As always, past performance isn't necessarily indicative of future results.
Best Banks
The first rather important lens to decide on is over what timeframe? I decided to pick 5, 10 and 20 years to get different perspectives.
Over 5 years the rankings go
1: National Bank 15.8
2: Royal Bank 15.16
3: EQB 14.9
4: Toronto Dominion 13.8
5: Bank of Montreal 12.6
6: Canadian Imperial Bank of Commerce 12.4
7: Scotiabank 12.3
8: Canadian Western Bank 9.65
9: Laurentian Bank 5.8
Over 10 years the rankings go
1: Royal Bank 15.7
2: EQB 15.5
3: National Bank 15.2
4: Canadian Imperial Bank of Commerce 15
5: Toronto Dominion 13.7
6: Scotiabank 13.3
7: Bank of Montreal 12.4
8: Canadian Western Bank 10.2
9: Laurentian Bank 7.3
Over 20 years the rankings go
1: Royal Bank 16.1
2: EQB 16
5: Scotiabank 15.5
3: National Bank 15.1
5: Canadian Imperial Bank of Commerce 15.1
6: Toronto Dominion 14.0
7: Bank of Montreal 13.4
8: Canadian Western Bank 12.1
9: Laurentian Bank 8.1
Some in the middle probably surprised people... I think most would have guessed Royal would be where it is.
Expected earnings yield
The next problem is that the market has assumptions. So I looked at what I'll call expected earnings yield. Essentially long run return on equity decided by price to book. This will be my basic cheapness factor.
I think this one was more interesting as it questions 'how much better does the market think'
It's still imperfect because of various payout ratios, and rates of growth on retained earnings but it's close.
Normalized Payout Ratios
On the topic of payout ratios... here's my 'normalized payout ratio' (today's payout vs the expected earnings)
Over 10 years the rankings go
1: EQB 14.5%
2: CWB 33.6%
3: LB 41.4%
4: NA 42.5%
5: CIBC 44.1%
6: RY 45.6%
7: TD 47.5%
8: BMO 48%
9: BNS 50.1%
Upside to 10X Earnings
On a similar 'judgmental' metric, I looked at what the upside in valuation would have to be to get the company to a 10% earning yield. I picked 10x with the thought that at 10x earnings all companies would have 'the ability' to payout all earnings for a 10% expected return which is in the range of reasonable.
Over 10 years the rankings go
1: LB 64%
2: CIBC 55%
3: CWB 43%
4: EQB 42%
5: BNS 40%
6: BMO 11%
7: NA 8%
8: RY 3%
9: TD 2%
*** as of the time of writing this, this will fluctuate by the day and the quarter***
Keep in mind, retained earnings would ideally increase these numbers over time. The scale of the increase could be 3%-10% per year depending on the results and the case.
It should be noted that the higher ROE banks would have increased benefits on retained earnings in the very long term... if they retain them at least. Given the difference between the main banks is so small, I didn't go too far into the attempt to sort out the minutia there as it would take many years to see a noticeable difference.
Can't really look at banks without some capitalization comparison. On a global scale, Canadian banks are all very well capitalized but here you go:
I'm making this up now... but this is how many of the last 20 years each bank was the best performing (based on my data)
CIBC 9 (I know right... the same guys who have no share appreciation since 2007?)
BNS 2
RY 2
BMO 2
NA 2
EQB 2
TD 1
CWB No
LB Lol
Commentary
To the surprise of no one, Royal is probably the best bank. Unfortunately "Canada's Worst Bank" aka Canadian Western Bank (CWB) isn't the worst bank. That title probably belongs with Laurentian.
I wasn't particularly surprised about LB and CWB being the bottom two by a decent length. I was surprised that the data matched my "eyeball test" for BNS, CM, BMO and TD being almost interchangeable over many timeframes. I also admittedly didn't expect CIBC to have scored so well over 10 years or Scoita over 20.
I also had in my head that there was a bigger gap between the top banks like Royal and the rest. In reality, it's 2-3% over most timeframes. In fairness, that adds up over time. I guess my misconception came from... stock performance. I think a big factor is everyone knows Royal is the best, but fewer think about how good some others were many years ago. Some have seen expectations collapse in slow motion over time. If unjustified, that certainly makes them more interesting.
CIBC
CIBC was the bank with the most chaotic results. They were the best bank 9 times but if you exclude CWB and LB from the worst bank calculations, CIBC was the worst bank 5 time too. That's 14 of the 20 years that they were either 1/7 or 7/7 CIBC: Consistency Isn't Bank's Code.
Scotiabank
Scotia was the best bank over the first 10 years I looked at... which is surprising because over the second decade it was the worst of the big 6. I didn't know this going in.
Bank of Montreal
BMO has lagged the other big 6 members over most timeframes. Only recently did CIBC and BNS catch down as BMO improved.
Toronto Dominion
TD has been very medium among the banks. That's not to say a medium bank as all the Canadian banks have done pretty well globally.
National Bank
National has actually been pretty good for longer than many might think. While most has a hiccup in the GFC, National really had 3 bad years. Recently it has been the best of the banks but it's also been fine over longer periods.
Royal Bank
Nobody sits higher than the king... that's the rule of Canada. Royal has long been one of the greats, stocks, companies and banks. National has been slightly batter in recent years but the consistency of Royal for a long time has been what stuck out. They've only been the best in 2 of the last 20 years but still wind up on top.
EQB
EQB scores pretty well across most perspectives, near the top across many timeframes in operating and cheapness. It really only would stand out to the negative because of the low dividend. Others would look at that same fact as a significant positive due to the significant growth.
Laurentian
There has been a concerning decline in the last few years. Perhaps that's why we're seeing the executive exodus. They're surprisingly cheap on assets that they can't seem to get much out of. Most upside if they can turn recent results around but there's little to suggest they are.
Canadian Western Bank
Not Canada's worst bank... But far from Canada's best. CWB is clearly not on the same level as the rest but it's unclear if their "western" exposure would make them less vulnerable going forward. They certainly are not as proficient as they once were (like many)... So there's certainly potential for upside surprise if they can recover.
Fading Earnings
The last 5 years haven't been straightforward. There was an economic slowdown in 2019, Covid in 2020, a bit of a bounce in 2021 before rapid enough rate hikes to send shockwaves through the banking system in 2022 & 2023. It's always difficult to pin down what's going on in a single year with provisions/provision releases etc. That said, most of the banks have put out lower to noticeably lower numbers in the last 5 years. When that persists, it's hard to tell if they're deteriorating or if it's a temporarily uncooperative market.
I think the idea of 'broken banks' bleeds into the fear of a bursting housing bubble in Canada... Negative amortization of mortgages and so on. I couldn't tell you what next year will look like let alone the next 10. I can say that if you remove the word "bank," and look at the history and the price that today's market is giving the performance data suggests some above average returns even using the lower end of historic results. The risk to that statement is a continued prolonged trend in lower earnings or a severe crisis.
Conclusion
They say past performance isn't indicative of future results... Then they go out and pretend to have a good idea of what's going to happen in the future. We've seen multiple rate hiking cycles and crises over the last 20 years. We've seen periods with strong growth and periods of weak growth. Some banks have stayed strong, others have weakened. We can only wait to see what the next 20 years brings.