As of this writing three of Canada’s six largest banks are trading just off 52-week highs established during early trading on the Toronto Stock Exchange (TSX) on Friday morning, Nov. 8, 2013.

The other three reached their one-year home-market price peaks on Oct. 29 and Nov. 1, two topping out on the latter date.

It’s heady times for a group of institutions that together have helped earn Canada the title as the world’s most sound banking system from the World Economic Forum for six years running.

The aggregate dividend record is impressive as well, with the Big Six combining for 27 payout increases since November 2010.

That’s despite regulatory and fundamental challenges, including an effort by the Canadian federal government to cool Canada’s housing market via new mortgage restrictions, new rules on capital buffers recently imposed to protect against the potential impact of another financial crisis and generally weak economic conditions in North America.

In March 2013 the Big Six were designated “too big to be allowed to fail” by Canada’s Office of the Superintendent of Financial Institutions (OFSI). As such they’ll be subject to more stringent capital requirements and supervision.

The six biggest banks account for over 90 percent of total banking assets in Canada.

The Big Six will need to have a common equity tier 1 ratio of 8 percent, compared to 7 percent for smaller, less important financial institutions, as of Jan. 1, 2016. What it means in practice is that the Big Six will have to hold more assets in reserve to protect against a sudden run on deposits.

The OFSI based its designation on a framework issued by the Basel committee on banking oversight in October that set out guidelines for assessing domestic financial institutions. It was a move widely anticipated by markets, and it’s had no impact on valuations.

Witness the recent run by banks on their 52-week–in fact their all-time–highs.

The banks were already in strong capital positions vis-à-vis the Basel III requirements, and the two-year-plus window provides ample opportunity to make the transition.

Mortgage lending remains a lynchpin of Big Six earnings, with loan volumes continuing to drive growth despite efforts by policymakers to combat rising leverage among Canadian households. Solid if unspectacular labor conditions, including decent wage growth, has helped Canadians begin the process of deleveraging, which will lead to more muted profit growth for the Big Six compared to 2011 and 2012. But steady profits from mortgage lending should continue.

In short, a much-hyped story anticipating deteriorating conditions in the housing market, leading to dramatic price declines and losses at the banks, has yet to materialize.

Banks should also benefit should interest rates begin to move meaningfully higher.

Net interest margins–he difference between banks’ cost of funding and the rate they charge borrowers–have been compressed with official interest rates at historic lows. “Tapering” in the US, if/when it happens, will be good news for the Big Six.

Banks have already been boosting mortgage rates, along with other lending rates, which should translate to net interest margin growth.

News that US gross domestic product (GDP) expanded by 2.8 percent during the third quarter of 2013 is also a positive sign for Canada. The US and Canada still comprise the biggest bilateral trade relationship in the world, so what’s good for the senior partner is good for the junior.

Favorites, Old and New

Bank of Nova Scotia (TSX: BNS, NYSE: BNS), a member of the CE Portfolio Conservative Holdings, is now and has been for some time our top pick among Canada’s largest banks, a preference rooted in its combination of a solid domestic banking franchise and a growing presence in emerging markets in Latin America and Asia.

A diversified earnings base is Scotiabank’s primary strength, with solid distribution among its four operating units: Canadian Banking (33 percent), International Banking (25 percent), Global Wealth Management (19 percent), and Global Banking and Markets (23 percent).

The most internationally diversified of the Big Six, Scotiabank is exposed to attractive long-term growth prospects from emerging markets. Its global reach also provides a measure of diversification from the North American economic environment. It has a longstanding banking history in the Caribbean, strength in Mexico and operations in Central America, South America and Asia.

Total assets are up 27 percent since Oct. 31, 2011, the fastest pace among its domestic peer group. But Scotiabank has also been able to maintain solid returns during this period of expansion, with an average return on equity (ROE) of 17.4 percent for the five-and-a-half years beginning in 2008.

Cost discipline has allowed it to maintain an average efficiency ratio of 55 percent over the past 10 years, compared to an average of 66 percent for its peers.

Scotiabank has raised its dividend five times since the end of the Great Financial Crisis, including a 3.3 percent increase announced along with fiscal 2013 third-quarter results on Aug. 27, 2013.

Earnings per share for the period, excluding items, were CAD1.30, an increase of 12 percent. Three out of Scotiabank’s four business lines had double-digit revenue growth, with its Canadian business doing “exceptionally well.” Provisions for credit losses were down to CAD314 million from CAD402 million a year earlier.

Management will report fiscal 2013 fourth-quarter and full-year results on Dec. 6, 2013.

Eleven Bay Street analysts rate Scotiabank a “buy.” Seven rate it a “hold,” while two rate the bank a “sell.” The average 12-month target price, culled from 16 of the 20 analysts who cover the stock, is CAD65.24, with a high of CAD71 and a low of CAD56.40.

We rate Bank of Nova Scotia a buy under USD60 for stable long-term income and growth.

Bank of Montreal (TSX: BMO, NYSE: BMO) has posted the second-best 12-month total return in US dollar terms among the Big Six at 24.1 percent.

Although typically not a market-share leader, BMO has solid domestic consumer, commercial and wholesale businesses. And it’s beginning to enjoy the benefits of a growing presence in the US that sets up a North American personal and commercial banking platform.

BMO’s integration of its 2011 acquisition of Milwaukee, Wisconsin-based Marshall and Ilsley has been relatively painless, with the lion’s share of anticipated cost savings and efficiencies achieved. The strong credit performance of the acquired portfolio has led to substantial recoveries over the past two years.

The acquisition boosted the scale of BMO’s US operation, and it provided further exposure to an economy that, given the third-quarter gross domestic product (GDP) growth rate of 2.8 percent, continues to show signs of resilience and unexpected strength, and a real estate market that’s in a solid recovery. It also exposes BMO to the US interest rate and regulatory environments.

Over the past 10 years BMO generated an average ROE of 15.5 percent compared to an average of 17.6 percent for its five peers.

BMO posted adjusted net income per share of CAD1.68 for the third quarter of fiscal 2013, as adjusted earnings were up 17 percent to CAD970 million. Management declared a CAD0.74 per share dividend, unchanged from the prior quarter.

The bank’s Basel III common equity ratio was 9.6 percent as of July 31, 2013, the highest among Canada’s biggest banks. BMO has consistently been at the high end of the sector in terms of its capital position.

Management has been more cautious than its Big Six peers about dividend increases in the aftermath of the Great Financial Crisis, with just two increases, the first coming just in August 2012. Bloomberg, however, forecasts an increase along with fiscal 2013 fourth-quarter and full-year results on Dec. 3, 2013, to CAD0.76 from the current rate of CAD0.74.

Recent success in the US, backed by its well-managed Canadian franchise and conservative capital management, do position the bank for shareholder-friendly moves such as dividend increases and share buybacks.

BMO is also trading at attractive valuations relative to its peers, with a current price-to-earnings ratio of 11.09 and a price-to-book ratio of 1.72.

Bank of Montreal, set to benefit from its US presence, is now a buy on dips to USD66.

National Bank of Canada (TSX: NA, OTC: NTIOF), the smallest of the Big Six with a market capitalization of approximately CAD15 billion, has actually been the best performer on a total return basis over the past three, five and 10 years.

And its return on equity–a key measure of bank performance–has been above 20 percent for two running, outpacing figures posted by its larger peers.

Quebec-based National Bank is the most regionally concentrated of the Big Six, with operations focused mostly in its home province. That’s a source of concern for analysts and institutions, worried that a lack of diversification exposes National Bank too much to the economic ups and downs in Quebec.

But the revenue mix is changing, with a growing percentage derived from outside Quebec, including 20 percent of retail, 50 percent of Wealth Management and 70 percent of Financial Markets. At the same time 65 percent of revenue was derived from Quebec in fiscal 2012.

Even as it’s trading at an all-time high, National Bank trades at a discount to its five bigger peers on a price-to-earnings basis (10.22 versus a group average of 11.09).

National Bank reported adjusted net income of CAD391 million, up 11 percent from CAD353 million a year ago and a company record. Earnings per share were CAD2.22, up 12 percent compared to the third quarter of fiscal 2012.

Management noted sustained growth across all three business segments.

Credit quality and financial strength remain strong, and management underscored the success of strategy of expanding across Canada, with particular strength in Wealth Management and Financial Markets.

National Bank was the first of the Big Six to raise its dividend in the aftermath of the Great Financial Crisis and has increased its quarterly payout a total of six times since November 2010. Bloomberg forecasts an increase to CAD0.91 from CAD0.87 when management presents fiscal 2013 fourth-quarter and full-year results on Dec. 5, 2013.

National Bank of Canada is now a buy in dips to USD85.

Solid Holds

Royal Bank of Canada (TSX: RY, NYSE: RY), the biggest of Canada’s big banks, is also among the two priciest on price-to-earnings and price-to-book terms. It’s also produced the best 12-month total return in US dollar terms, 25.1 percent from Nov. 9, 2012, through midday Nov. 8, 2013.

The benefits of RBC’s diversified business model are reflected in its resilient performance, including an average return on equity of 18.8 percent since 2000.

RBC is driven by double-digit growth across all of RBC’s operating segments, excluding Insurance, which experienced a slight decline in earnings contribution.

RBC continues to build on its leading market positions within Canada and expanding its presence globally, particularly in wealth management and in capital markets where it’s been increasing its market share among the top global banks.

RBC has a highly diversified business model, operating in five major segments (Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services and Capital Markets), which has historically provided stability to earnings.

Over the first six months of fiscal 2013 approximately 79 percent of earnings were generated by retail operations and 21 percent came from wholesale, within range of management’s targeted 75 percent/25 percent split.

RBC has one of the leading Canadian retail franchises among its Canadian peers, the domestic businesses diversified by product, geography and customer. It has leading or near-leading market share positions in almost all product lines.

RBC also has the largest distribution network among Canadian banks, including branches and automated bank machines, one of Canada’s largest full-service brokerage firms and a diversified insurance operation. Its RBC Capital Markets operation is one of the country’s most diverse, and it has a global presence.

Given its significant market-share positions in Canada as well as the maturity of the market and competition from peers domestic growth is hard to come by, absent significant broader market growth.

Overall earnings are also more dependent on a relative basis on often-volatile capital markets operations.

RBC has raised its dividend a total of five times since May 2011, including in August 2013 when it reported fiscal 2013 third-quarter results.

Management reported net income for the period of CAD2.2 billion, up from CAD2 billion a year ago.

Royal Bank of Canada remains a hold, also for reasons of valuation.

Toronto-Dominion Bank (TSX: TD, NYSE: TD), along with National Bank and Bank of Nova Scotia, established a 52-week high on Nov. 8, CAD96.95 on the TSX.

No. 2 among the Big Six in terms of market capitalization, TD has leading domestic market shares (No. 1 or No. 2) in most personal banking businesses. Customer satisfaction levels have continued to show strength, contributing to favorable customer retention rates and higher revenue per client, despite increased retail competition from peers.

TD also has a lower business risk profile than many of its peers, as a result of its large diversified retail operations relative to its wholesale business.

Over the first six months of fiscal 2013 approximately 90 percent of income was derived from retail businesses, Personal and Commercial Banking in Canada and the US, as well as Wealth and Insurance. Its retail focus contributes to its long-term earnings stability.

TD has also created a retail banking corridor in the Eastern US, with more than 1,300 branches south of the border, and is well exposed to the still-emerging economic recovery in the States.

At the same time management continues to expand its US presence, at significant and rising cost.

And its Canadian loan portfolio is concentrated in Ontario, which accounts for 64 percent of overall domestic lending. Ontario is highly dependent on manufacturing, and home price have soared in the Greater Toronto Area, exposing TD more than its peers to a housing correction.

TD reported fiscal 2013 third-quarter 2013 adjusted earnings per share of CAD1.65, down from CAD1.91 a year ago, mainly due to a decline in fee income and higher operating expenses, partially offset by increased net interest income. Excluding items net income was off 10.3 percent to CAD1.52 billion.

TD has raised its dividend a total of six times since March 2011, from CAD0.61 to the current quarterly rate of CAD0.85 per share. That level should hold when management reports fiscal 2013 fourth-quarter and full-year results on Dec. 5, 2013.

Toronto-Dominion Bank remains a hold, largely on valuation grounds.

Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) has one of the larger multi-pronged distribution networks in Canada to service its 11 million retail customers, the result of five years’ work building out, relocating and refurbishing its branch network.

And CIBC has focused on becoming the market leader in the mobile banking–it was the first Canadian bank to allow customers to use their credit card through their smartphone to make purchases.

Relative to the other Canadian banks, CIBC has one of the largest wealth management platforms, positioning it to benefit from longer-term demographic shifts given an aging baby boomer population.

Its Wholesale Banking segment is one of Canada’s leading full-service investment banks, with an objective to be top three in core businesses.

Management has a disciplined capital allocation process, a result of dramatic capital reductions in Wholesale Banking during the Great Financial Crisis. CIBC has only modestly increased capital deployed within the segment, turning instead to growing the corporate loan book, specifically in real estate and construction and natural resources, and targeted acquisitions currently focused within Wealth Management.

A key challenge for CIBC is to maintain earnings stability following the restructuring of its Wholesale Banking business.

CIBC also gets below-average score on customer satisfaction index rankings, which complicates its Canadian retail markets strategy to increase product penetration using a relationship-based approach.

Perhaps the hardest hit among Canada’s Big Six during the Great Financial Crisis, CIBC has taken considerable measures to reduce exposure to the structured credit run-off portfolio, through securing USD11.07 billion in credit protection and by taking substantial valuation write-downs on the portfolio.

Another key question is the effectiveness of the risk-management changes implemented in the wake of the financial crisis, though a chastened management team is likely to maintain risk discipline going forward.

CIBC reported fiscal 2013 third-quarter adjusted earnings per share of CAD2.16, up 8 percent year over year, as solid revenue growth offset rising operating expenses. A slight deterioration in assets as well as credit quality took some shine off the numbers.

No. 5 among the Big Six in terms of market capitalization, CIBC is No. 6 in terms of trailing 12-month US dollar total return.

The bank has raised its quarterly dividend three times since August 2011, from CAD0.87 to the current rate of CAD0.94. Management will report fiscal 2013 third-quarter results on Dec. 5, 2013.