Canadian bank headquarters on Bay Street in Toronto.Bloomberg
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Investors could spend hours, if not days, scouring every earnings report and every moving part of each of Canada's big five banks in order to decipher whether to buy, sell or hold their stocks.
But traditional ways of analyzing the banks, while always important, are less relevant in this unprecedented period of low economic growth and ultra-low interest rates.
That's the opinion of John Stephenson, who spoke to Capital Ideas Research about the investment case for the banks. Mr. Stephenson is the president and chief executive officer of Stephenson & Company Capital Management, an alternative asset management firm that specializes in long and short equity investing.
Mr. Stephenson has won awards from Morningstar and Brendan Wood International for his performance as a portfolio manager, and has written two books on investing. He believes global interest rates will be low for an extended period, as will economic growth, and in that environment, he says it's "unbelievable" how appealing Canada's big banks are as investments.
Rates may not just be lower for longer, they may be lower for our lifetime, according to Mr. Stephenson. In that environment, he says the Canadian banks are exceedingly attractive investments due to their superior and protected franchises, and comparatively healthy dividend yields.
Is the Western world turning Japanese?
"I think interest rates are going to be very low for a long time," Mr. Stephenson says. "I think Japan is illustrative. It's been grappling with its ageing demographic for some time and if you look across the Western world, I'm not saying we're as bad as Japan, but we're not that far off either."
Banks look good amid central bank distortions
Mr. Stephenson thinks central banks have distorted financial markets with their ultra-low and negative interest rate policies, which make the big five's dividends even more alluring.
"Central banks have become the only game in town," Mr. Stephenson says. "They're the only ones doing anything. They've kept the rates extraordinarily low which has inflated stocks, it's divorced markets from fundamentals largely and it's driven up asset prices particularly in real estate. In that sense, anything that's paying a yield is going to be extremely prized. In that context, the banks look incredibly good."
Does the credit cycle still matter?
Analysts traditionally size up the big banks based on the credit cycle. Lending risks are minimal when interest rates are low, and risks for the banks are higher after the peak of a credit cycle and rates begin to rise. But Mr. Stephenson believes the credit risks of the banks are less of a factor these days.
"I think the reality is they are cash cows," Mr. Stephenson says. "The credit issue is overblown because Canadian banks are about the best capital allocators there are in the world. I mean, these things are pretty much on auto pilot. I think you buy them on dips because the overwhelming driver for this is the healthy yield."
Total return is the key
Mr. Stephenson urges investors to not purely focus on a company's dividend yield.
"You've got to look at total return, which is price return plus your dividend," Mr. Stephenson says. "In the case of the banks you've got reasonably high yields, and you've got superior businesses, solid franchises that everyone around the country knows. You've got to look as an investor at what you're getting at the end of day."
Banks benefit if rates rise
Mr. Stephenson thinks investor will do well owning the big five Canadian banks even if he's wrong about interest rates remaining low for a long time.
"You've got an opportunity if the lower-for-longer thesis is no longer valid," Mr. Stephenson says. "That means they'll have higher net interest margins and therefore be more profitable, so you should be able to make up for it through capital gain what you lose in current yield."
Play the long game with the big banks
Historically, Canada's big banks have been very strong investments. Royal Bank of Canada and Toronto-Dominion Bank, for example, have both risen more than 1,000 per cent since 1995. Credit cycles, market downturns and skeptical U.S. hedge funds come and go. But, over the years, the shares of the banks generally keep churning higher. Mr. Stephenson thinks any concerns about the country's banks are ultimately outweighed by a raft of positive tailwinds.
"All the supposed problems are non-problems, really," he says. "The oil and gas lending was not a problem. Real estate's a non-item because most of the mortgages that are dodgy are insured by the federal government. You go through the laundry list and it's unbelievable how good the banks look, and particularly even on a global basis how good they look."