Looking for another way to invest the Canadian Loonie, which I called the world’s greatest currency, in my August 6 post? (See “The world’s greatest currency? The Canadian Loonie gets my vote. And soon some of my money” https://jubakpicks.com/2009/08/06/the-worlds-greatest-currency-canadas-loonie-gets-my-vote-and-soon-some-of-my-money/ )
It’s time to take a serious look at Canada’s banks. Their balance sheets are stronger; the Canadian housing market is closer to a turn-around than that in the United States; and with Canadian regulations keeping non-Canadian competition in the country’s banking sector to a minimum, they’ve free to use their home profits to expand into the much bigger U.S. market.
My favorite among the Canadian banks is Toronto Dominion (TD) because it’s furthest along in its penetration of the U.S. market. That meant it took more of a beating when the U.S. banking market fell into near collapse but it also means the stock has, in my opinion, the most upside.
But you can make a case for most of the big Canadian banks after they announced quarterly earnings on August 27.
Royal Bank of Canada (RY), Canada’s largest lender, said third-quarter net income rose 24%. Toronto Dominion, the country’s second largest bank, said earning fell 8.5% including one –time charges but exceeded analyst estimates.
Bank of Montreal (BMO) also beat analyst estimates when it reported on August 25.
The banks are still putting money away to cover higher losses from loans and credit cards—only prudent since Canada’s unemployment rate is at an 11-year high. Royal Bank, for example, set aside about $CDN 770 million (U.S. $702 million) for bad loans in the quarter. That’s about twice the amount set aside in the same quarter of 2008.
But neither the loan losses or loan loss reserves are enough to threaten balance sheets at these banks.
And in some business segments business is booming.
At Toronto Dominion Canadian consumer banking revenue climbed 5% to a new company record. (In the United States Toronto Dominion is still racking up substantial costs to integrate its banking network after the acquisition of Commerce Bancorp. Due to the acquisition, the bank has about as many branches in the United States as it does in Canada.)
Earnings from the bank’s TD Securities investment bank showed an eight-time jump.
At Bank of Montreal, profit climbed by almost 7% in the quarter.
I’ll be looking to add a position in this group at the first sign of any correction—or after I get back from my vacation in September and can dig deeper into their valuations.
Whichever comes first.
(Full disclosure: I own shares of Toronto Dominion in my personal portfolio.)
I have owned and traded on the edges Bank of Nova Scotia (BNS) for years with great success so I agree with you Jim that Canadian banks are good solid investments. I do find it somewhat illogical that you like TD the best because it has the most exposure to the US market. The reason you should own Canadian banks is because they ARE NOT American banks and have not been run like American banks. Less exposure to the $US is also something to consider. Scotia has better exposure to latin america, which I prefer. I will be a buyer under 39.
These banks also pay decent dividends, which are not so likely to be cut, and are raising those dividends quite nicely over the last few years.
I own shares of Royal Bank (aka RBC), which I bought at $40.00 (CDN) in October. It’s now trading at $56.10 (CDN). I posted an analysis of the royal’s numbers on my blog at the time I bought.
Just do a Google blog search on “Bought Royal Bank @ 40 $CDN” to see the analysis.
Jim, your Jubak’s picks lists HSBC (HBC) as a pick because of the wealth management potential in rapidly developing nations. Do you prefer this stock in the near future for the banking sector, or are international (developing nations) banks still too risky?…