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Bank Stocks

What are bank stocks?

Bank stocks represent partial ownership in a financial institution that’s licensed to hold and loan money. Over time, bank stocks have been relatively safe investments, as they offer products and services that most people need.

How do you choose a good bank stock? 

1. Look at the bank’s profitability

First, you want to be sure the bank is even profitable. To do that, you can use the following metrics. 

  • Return on equity (ROE): this metric tells you how much profit a bank makes from its shareholder’s equity. The higher this metric, the more efficient a bank is using its stakeholder’s money. 
  • Return on assets (ROA): the ROA tells you the overall profit a bank makes in relation to its assets. The higher the ROA, the more profit a bank makes from its assets. 
  • Efficiency ratio: the efficiency ratio tells you how much revenue a bank uses towards its operating costs. The lower the efficiency ratio, the more revenue a bank theoretically has. 

2. Assess the bank’s risks 

One of the biggest risks a bank has is losing money on an outstanding loan. As with profitability, a couple metrics could help you see how much banks are losing.

  • Nonperforming loans ratio (NPL): Nonperforming loans are loans that are at least 90 days past their due date. A bank with a low percentage of NPL (2% is a good ratio) is doing fairly well collecting loan repayments from its customers. 
  • Net charge-offs: a net charge-off is a bank’s declaration stating that a loan hasn’t been paid and is unlikely to be paid. As with NPLs, the less net charge-offs a bank has, the less money it’s losing on outstanding loans. 

3.  Check back here for our top picks 

Finally, we’ll keep this page updated with our staff writer’s reviews and assessment of Canada’s bank stocks. Our writers often use these metrics to help investors see which bank stocks are doing well and which are doing poorly. 

Check back here for the most up to date information about bank stocks in Canada.

Top Articles

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| Adam Othman

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| Karen Thomas, MSc, CFA

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| Christopher Liew, CFA

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| Nelson Smith

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Why Now Is the Time to Get Greedy With the Canadian Banks

| Joey Frenette

Why Scotiabank (TSX:BNS)(NYSE:BNS) could be your ticket to financial freedom amid unfavourable macro conditions.

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| Andrew Walker

Here's how Canadian pensioners can boost income without triggering OAS clawbacks.

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Forget Gold! Buy This 5%-Yield Dividend Stock Instead

| Kay Ng

Don’t be tricked by the short-term spike in gold prices. Buy Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) stock instead.

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3 Canadian Bank Stocks to Watch in 2020

| Andrew Button

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| Karen Thomas, MSc, CFA

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) just reported disappointing Q4 results. Expect continued short-term pain, but remain focused on the long-term and ready…

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| Andrew Walker

Canadian retirees are searching for ways to earn additional tax-free income.

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| Victoria Hetherington

Gold is a buy as risk ramps up, with stocks like Wesdome Gold Mines Ltd. (TSX:WDO) looking attractive.

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Why Royal Bank of Canada (TSX:RY) Is a Top Stock for 2020!

| Joey Frenette

At today's multiples, Royal Bank of Canada (TSX:RY)(NYSE:RY) may be the best dividend pick for your next $6,000 TFSA contribution.

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Frequently Asked Questions

Why invest in bank stocks?

Quality bank stocks have a strong history of generating profits and managing crises, making them a great investment.

In addition to their strong performance, many of Canada’s top banks pay dividends, with payouts that increase over time. For Canadian investors looking to pocket a little extra from their stocks, dividends can help you buy more shares or more cash.

Finally, bank stocks can help diversify your investing portfolio. If you already have stocks in other sectors (mining, technology, energy), bank stocks could add much needed stability, as well as expose you to the gains in another sector.