The top performing Canadian banks over the past 10 years will likely be the leaders over the next 10 years, too, says UBS Securities Canada Inc.

In a new report, UBS looks at the performance of the big banks over the past 10 years, and picks out the key drivers of historical performance. UBS notes that provisions for credit losses were important, but not nearly as critical as other factors such as loan growth, margins, non-interest revenue growth, expense control and tax efficiency.

Certain factors were not as significant as might be expected. Dividends are important, contributing 30% of total shareholder return, but UBS finds, “higher dividends did not distinguish the best performing banks.”

Also, UBS notes, “While we might assume that market sensitive revenues such as trading, underwriting, and securities gains were key revenue drivers; they were not, at about 21% of total revenues.” As a result, UBS suggests, “the recent focus on trading revenues is likely overdone on a long-term basis.”

Ultimately, UBS concludes, “capital deployment was the single most important driver of [return on equity].” For example, it says that it matters much more how much of a bank’s invested assets are in much higher return Canadian domestic banking assets, earning much higher returns, versus low-returning U.S. assets.

The report notes that the three largest banks, Bank of Nova Scoita, Royal Bank of Canada and Toronto-Dominion Bank grew over 2.5x faster than the three smaller banks. “We think that these banks have structural advantages that are hard to duplicate, which could likely continue to result in higher growth and earnings,” it says.

IE