The Investor’s Guide to Picking Canadian Bank Stocks: Royal Bank of Canada (USA) (RY), Toronto-Dominion Bank (USA) (TD), The Bank of Nova Scotia (BNS)

It’s a challenge to pick among Canada’s apparently identical Big-5 banks. In investment circles, most discussion is centered on which stock is the cheapest. But with each company pursuing diverging strategies, investors should base their decision on their own thesis.

Royal Bank of Canada (USA) (NYSE:RY)

Thesis: With the worst of the financial crisis behind us, the global investment banking industry is poised for a rebound.

With $90 billion in market capitalization, Royal Bank of Canada (USA) (NYSE:RY) is the nation’s biggest and most diversified financial institution. RBC has its hands in every pot with the broadest geographical exposure and business lines. The company has operations in banking, wealth management, insurance and trading.

RBC’s investment banking business is the 12th largest internationally. Global M&A activity has been weak due to the fallout from the financial crisis but now there’s a lot of pent up demand from companies to issue debt, spin-off assets, merge, or go-private. RBC is the best play on the M&A rebound with investment banking accounting for 23% of the company’s income in 2012.

The Bank of Nova Scotia (NYSE:BNS)

Thesis: The emerging economies of Asia and Latin America are poised to deliver double-digit growth over the next decade.

The Bank of Nova Scotia (NYSE:BNS) is the most exotic of the Big-5 Canadian banks giving investors exposure to fast growing emerging economies like China, India, and Brazil. The company’s international operations posted 18% earnings growth in 2012 and accounted for 50% of the company’s profits.

BNS’s acquisition strategy has been to diversify its bets among several countries with small investments. Then the company waits patiently for the opportunity to make a major acquisition.

This tactic is risky. Almost a decade years ago, BNS took large losses when the Argentina government unexpectedly nationalized foreign banking assets. Yet the company’s investments in Peru and Columbia have paid off handsomely.

Canadian Imperial Bank of Commerce (NYSE:CM)

Thesis: Canada is well positioned due to the country’s resource boom and sound financial system.

The Canadian Imperial Bank of Commerce (NYSE:CM) is the smallest of the Big-5 by deposits. The company’s operations are primarily domestic making CIBC the closest thing to a pure play on Canadian retail banking.

CIBC was hit hard during the financial crisis when the company lost billions on sour U.S. mortgage bets. Since then the company has shored up its balance sheet and operations. CIBC has the highest Tier 1 capital ratio in the space and was rated the strongest bank North American by Bloomberg Markets Magazine.