Triple Play: Canadian Bank Buys

03/10/2016 10:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

The Canadian banking sector has been under pressure, with worried investors looking at the problems among European and US banks, notes Gavin Graham in Interview Wealth Builder.

However, Canadian banks remain amongst the best capitalized and most conservatively managed in the developed world.

They came through the financial crisis of 2008-09 without needing to cut dividends or raise capital at dilutive prices, something that neither the US nor European banks managed.

While investors are understandably concerned about the effect of weak oil prices, Canadian banks experienced similar commodity price falls in 2008-2009 and 2001-2002 and emerged relatively unscathed.

Royal Bank (RY) is the largest and most profitable of the Canadian banks. It remains a buy for its rock solid capital base, dominant position in Canadian retail, and its growing wealth management business.

The shares are selling at just 10 times 2015 earnings. The yield is 4.65%, close to the highest level since the financial crisis, and the dividends represent only 37% of earnings. The bottom line is that RBC is on sale.

Toronto-Dominion Bank (TD), the second largest Canadian bank, has more branches in the US (1,300) than in Canada (1,100).

With the dividend increased to $0.51 per quarter, TD sells at 10.8 times 2015 earnings and a 4% yield, representing a 34.2% payout ratio.

The stock remains a buy for its large US presence; growth in its own brand credit card operations and its strength in Canadian retail.

Scotia Bank (BNS) is the most internationally diversified of the Canadian banks, with over 40% of its net income generated from operations in Latin America, the Caribbean, and Asia.

The bank has focused on the four Latin American countries where it has a leading role: Mexico, Colombia, Peru, and Chile.

BNS remains a buy for its cheap valuation, strong position in the fastest growing Latin American and Asian markets, and its developing wealth management business, following the takeover of Dynamic mutual funds.

Scotia raised its dividend twice during the year; it is selling at 9.3 times 2015 earnings and yielding 5.18%, making it the cheapest of the these banks.

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