In the last few years, there has been a multitude of references to the "Big Five" Canadian banks as model of a stable banking industry (by market cap, the Big Five are: RBC, TD, BNS, BMO and CIBC). There has also been multiple recommendations to invest in Canadian banks. While in years past, it may have been easy to describe all members of the Big Five Canadian banks as one monolithic entity (and previous studies have shown the return of investment in the Big Five banks were more or less the same), something interesting has happened.
Aided by the relatively unimpaired flow of capital and boxed in by the more or less tapped out Canadian market, each of the Big Five banks are pursuing diverging corporate strategies, eschewing the traditional strategy of staying local (as an editorial note, the Competition Bureau's refusal to approve bank mergers in 1998 was, in hindsight, a smart move; rather than allow the banks do the easy thing, they forced them to be competitive globally).
For example, TD has become Well Fargo east: a bank with a large retail focus. In the last fiscal quarter, 88% of net income was from retail banking operations. Meanwhile, RBC's ambition is to become a global capital markets player. It has publicly stated it wants to derive 25% of its revenue from its capital markets segment. BNS is pursuing a Latin America and India strategy.
There are obviously investing implications which flow from these corporate strategies. As investors learned last week, a bank with a heavier emphasis on capital markets, such as RBC's, sometimes has volatile returns although only in the stock market do you get punished for being profitable and raising your dividend. A bank with a heavier retail focus, like TD, has lower margins and much more sensitive to the financial vulnerabilities of households.
In other words, it is not like yesteryear where one picked a Big Five bank and knew stock market performance was more or less would be in line with its peers. If one assumes that the Big Five banks continue to be a relatively safe stock play, the implication of this development would be to abandon picking one or two Big Five bank stocks and purchase an exchange traded fund which tracks the Big Five banks or financial institutions with a large weighting in bank stocks (for example: XFN: TSX has over 70% of its holdings in the Big Five plus National Bank).
The days of thinking one Canadian bank was like the others as a stock picker are over. It may be time to readjust investing strategies accordingly.
(for full disclosure, I own all Big Five bank stocks directly or indirectly through stocks and ETFs).
