by Tom Bradley

As a stock analyst, I always thought it was important to look at who a company’s customers were. The quality of the customers speaks volumes about the quality of the products and services.

This is only one part of any analysis, but it’s one that I’m not hearing discussed with respect to the Canadian banks. It’s clear that our banks are very strong companies. Their capital ratios are higher than ever. Profitability is insanely good. And they’re widely diversified across business lines, including basic banking, credit cards, car loans, wealth management, brokerage, investment banking, asset management, commercial and corporate lending, prime brokerage and insurance. You name it, if it’s financial, the banks are dominant players.

But back to where I started. The interesting thing about this strength and diversity is that it’s based on product line, not customer. Most of the banks' products, and a vast majority of their profits, relate to just one customer - individual Canadians.

So, in assessing the banks on my obscure Customer Quality Metric, we may be hitting on one of their only weaknesses. Their customers are getting tapped out. They’re up to their eyeballs in debt and in two of the banks biggest markets – Toronto and Vancouver – their bricks and mortar collateral is highly priced.

Do I think the banks are at financial risk? No.

Do I think they will continue to be highly profitable? Most likely.

Do I think we should pay more attention to who’s paying the bills? Absolutely.

At Steadyhand, we have exposure to Canadian bank bonds and stocks, but it’s perceptively lower than other Canadian-based managers. In the Founders Fund, which is a good representation of our balanced clients’ portfolios, financial services represent 20% of total equities. TD Bank is the largest stock holding in the firm (it’s held in the Income and Equity Funds), but RBC and Scotiabank don’t show up in the top 15. Rather, our financial service holdings are spread across a wide range of company types (banks, insurance, securities exchanges, credit rating services) and importantly, customers in a number of geographic regions including Europe, Asia and the emerging markets.