Three Ways to Bank on Canada

10/03/2018 5:00 am EST

Focus: FINANCIALS

Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Gavin Graham, president of Graham Investment Strategy, is an expert on foreign stocks and emerging and frontier markets; here, the contributing editor to Internet Wealth Builder reviews Canada's 3 largest banking institutions.

Royal Bank of Canada (RY), called RBC, is Canada`s largest bank and continues to benefit from its leading positions in mortgages and commercial lending. Its rapidly growing asset management business has expanded in the U.S. with acquisition of California-based National City, plus it runs the leading investment bank.

For the 2018 third quarter, to July 31, RBC reported record net income of $3.1 billion, up $313 million or 11%. Earnings per share grew 14% to $2.10. Personal and Commercial Banking — as well as Wealth Management — benefited from higher interest rates and increased volumes of loans and assets under management (AUM), helped by lower U.S. taxes after the Trump tax cut.

The quarterly dividend was raised $0.04 (4%) to $0.98 ($3.92 per year). That gives RBC a yield of 3.8%. RBC remains a Buy for its market leading positions, strong capital base, and expanding Wealth Management division.

Toronto-Dominion (TD) is Canada's second largest bank by market share (21%) and market capitalization and is the sixth largest bank in North America. It has 1,108 branches in Canada and is ranked first or second in most retail products.

It has even more branches (which it calls stores) in the U.S., with 1,246 outlets and operations in four of the top ten metropolitan areas, concentrated on the east coast. It also has a 42% stake in the leading on-line brokerage, TDAmeritrade.

TD's third quarter saw net income increase 12% to $3.1 billion. Earnings per share (EPS) were ahead 13% to $1.66. Adjusted for the charges last year on the acquisition of Scottrade Bank and the effects of the Trump administration's tax cut, adjusted EPS rose 10% to $1.66, with revenue up 6%. Expenses increased 5%, illustrating the beneficial effects of widening NIMs in a rising interest rate environment.

It is set to become the largest Canadian asset manager with $393 billion in assets under management after the acquisition of Greystone Managed Investments. TD expects Greystone to be accretive to adjusted EPS in year one (2018-19) and reported EPS in year three.

TD announced a $0.07 increase in its quarterly dividend to $0.67 per share, in the first quarter of its fiscal year. That gives it a yield of 3.4%. TD remains a Buy for its market leading positions in Canadian retail and asset management and its strong and growing U.S. presence, as well as its well-regarded professional management.

Bank of Nova Scotia (BNS), referred to as Scotiabank, is Canada's third largest bank and has the largest international exposure of any of the major chartered banks. Over one-third of its earnings are derived from the four Pacific Alliance countries of Mexico, Colombia, Peru, and Chile, plus the Caribbean and Asia-Pacific.

The bank has particular strengths in commercial lending, capital markets, and wealth management. The recent acquisitions of Canadian asset managers Jarislowsky Fraser and MD Financial have substantially increased its assets under management to make it the third largest active manager with $235 billion.

The stock has been the worst performer of the Big Six chartered banks over the last year, down 8.5% from the high of C$85.20 reached in November, 2017. This is partially due to its high exposure to emerging markets, which have entered a bear market due to the tariff increases announced by the Trump administration.

The quarterly dividend was raised by $0.03 to $0.85, up 8% year-over-year, giving Scotiabank a yield of 4.4%.

Buying the worst performing of the major chartered banks has reliably proved to be a way to outperform over the next twelve to eighteen months, as they all are essentially very similar businesses.

The management team, led by CEO Brian Porter, has a track record of successfully integrating new acquisitions. The stock remains a Buy for its effective cost control, high margin and growing international business, and its move to become a major player in wealth management.

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