Money Reporter Banks on Canada

09/25/2014 7:00 am EST

Focus: STOCKS

MPL Communications is a leading financial advisory firm focused on Canada; here, its Money Reporter newsletter highlights some opportunities among Canadian banking stocks.

The Bank of Nova Scotia ((NYSE:BNS) and (TSX: BNS))—or Scotiabank—is referred to as Canada’s most international bank. It provides financial services in over 55 countries.

The shares have fallen nearly 3% since the bank reported its third quarter results. A good part of this decline can be attributed to investors’ concerns about the bank’s foreign businesses. But we think these businesses, which have underwhelmed investors this year, are well positioned for growth in coming years.

Growth in Latin America was offset by weaker results in Asia and the Caribbean. Among the factors that offset growth was a decline in net interest margins and higher provisions for credit losses.

But management has noted a recent improvement in margins reflective of asset mix. And it also says credit quality has remained stable, with the increase in the provision for credit losses driven mainly by growth and acquisitions. What’s more, steps have been taken to reduce costs and improve efficiency.

We think Scotiabank’s foreign investments will pay off over time and help offset weaker results in Canada, whenever that occurs. Buy for growth and income.

Bank of Montreal ((NYSE:BMO) and (Toronto: BMO)), Canada’s fourth-largest bank by market capitalization, finds itself in a similar position to Scotiabank.

Though reported third-quarter cash earnings per share beat analysts’ expectations, its US operations dragged on results.

BMO’s adjusted earnings per share, or EPS, for the third quarter was $1.73, beating the consensus estimate by $0.07 a share, and up from $1.66 in the same quarter of last year.

Growth, so far, this fiscal year has been solid, reflecting strong growth in Canadian personal and commercial banking, wealth management, and BMO Capital Markets.

However, income from the US personal and commercial banking segment was down 7% to $473 million, primarily due to lower revenue, which was impacted by lower net interest margin and reduced gains on sales of newly originated mortgages.

As the US economy gradually improves, though, we expect the US segment to do much better. Bank of Montreal is rated a buy.

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