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Banking on Canada
08/27/2009 4:24 pm EST
Looking for another way to invest the Canadian Loonie, which I called the world’s greatest currency in my August 6 post?
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 turnaround than that in the United States, and with Canadian regulations keeping non-Canadian competition in the country’s banking sector to a minimum, they’re free to use their home profits to expand into the much bigger US market.
My favorite among the Canadian banks is Toronto Dominion (NYSE: TD) because it’s furthest along in its penetration of the US market. That meant it took more of a beating when the US 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 (NYSE: 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 (NYSE: 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 nor 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.)
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