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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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1 Big Bank That Might Have a Mega-Merger Soon

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The U.S. Yield Curve Is Inverting – Doomsday for Banks?

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BMO (TSX:BMO): Why Is It Selling US$2.1 Billion of its Shares?

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| Ambrose O'Callaghan

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Why’d Bank of Montreal (TSX:BMO) Stock Plunge 4% in a Day?

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The Key Reason Why Investors May Want to Consider BMO Stock

| Chris MacDonald

Here's why long-term investors may want to consider Bank of Montreal (TSX:BMO)(NYSE:BMO) stock in this current environment.

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2 TSX Bank Stocks to Buy in 2022 for Growth

| Tony Dong, MSc, CETF®

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| Demetris Afxentiou

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| Chris MacDonald

Here's why many investors may want to consider Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and TD stock in this current environment.

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| Ambrose O'Callaghan

Canadians should look to snatch up top bank stocks like National Bank of Canada (TSX:NA) after the first quarter earnings…

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Royal Bank of Canada (TSX:RY): A Top Stock to Buy Right Now?

| Joey Frenette

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| Rajiv Nanjapla

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Why Right Now Is the Time to Buy Big Six Banks for Major Income

| Amy Legate-Wolfe

The Big Six banks are solid options for investors during times of uncertainty, and these two provide the opportunity for…

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| Tony Dong, MSc, CETF®

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Given their attractive valuations and growth potential, I expect these three value stocks to deliver superior returns over the next…

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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.