The incredible thing most investors don’t realize about Canadian bank stocks

Most investors, Canadian or otherwise, are well aware of the benefits of investing in the best Canadian banking stocks.

These banks remain among the most robust dividend stocks on the market, paying higher dividends than most sectors, while also having some of the best capital growth profiles over the very long term.

Banks like Toronto Dominion Bank (TSX:TD), Royal Bank of Canada (TSX:RY), and Bank of Nova Scotia (TSX:BNS) have been among my top picks for a while now.

Let’s take a look at why these banks can continue to outperform for years and decades to come.

Incredible profitability and return on equity

In addition to the fact that most investors are well aware that Canadian banks benefit from a robust regulatory environment unlike most countries, have shown resilience in previous recessions, and have some of the most stable and diversified business models among their global peers, I would argue that fundamentals play a greater role in assessing the upside of these banks in the global context over time.

In fact, Canadian banks have shown an extremely high return on equity (ROE) of around 14% over the past decade. This compares to the ROE of the broader Canadian stock market, which is closer to 10%.

Return on equity matters because it is a primary measure by which many institutional investors assess the underlying strength of a given company. This measure suggests that Canadian banks’ capital controls are superior and could lead to superior returns over time.

Will this dynamic continue?

Of course, ROE is just one metric. On other metrics, such as price/earnings or price/sales, an argument can be made that other global banks may be cheaper or more value-oriented choices at this time.

But given the big picture, which includes the stability of the Canadian banking system and the robust and mature nature of this market, I would say that Canadian banks are undervalued relative to their quality and long-term growth potential.

Those looking for assets with a high return on equity at a time like this should consider Canadian banks as part of their portfolio structure. At least that’s my opinion.