Canada: Two to Bank On

10/16/2014 7:00 am EST

Focus: STOCKS

Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

Canadian banks are finding it tough to impress investors. All six major players turned in excellent third quarter results. Markets should have hailed the numbers. Instead, they shrugged. Jeered would be a better word, asserts Tom Slee in Internet Wealth Builder.

My first thought was that the banks' figures were deceptive, perhaps misleading. But that was not the case, quite the contrary. As I dug deeper, it became apparent that the results were even more encouraging.

Balance sheets are in good condition, the all-important return on equity (ROE) averaged an impressive 17.6%, up from 16.6%, and capital ratios are in good shape.

Given the current economic recovery, Canadian banks are extremely well positioned to do well in 2015. Loan loss experience continues to improve due, in part, to stable Canadian employment. Industry operating earnings per share has been growing at 11% and that is likely to continue.

My feeling is that—at present levels—bank stocks are not fully reflecting this promising outlook. There is upside potential. I also think bank stocks provide a defensive hedge against any serious correction. They should be an important part of all portfolios.

Bank of Nova Scotia (TSX:BNS) (NY: BNS)

Scotiabank turned in an impressive third quarter. The bank boasts an impressive 10.9% capital ratio. The dividend was increased to $2.64 per annum.

Scotiabank offers an attractive combination of a rock solid Canadian major bank and meaningful exposure to Latin America, the Caribbean, and Asia. As a matter of fact, this stock is an excellent way for more conservative investors to play the emerging markets.

That having been said, there are going to be occasional disappointments because of the uncertainties associated with foreign operations.

In the third quarter, lower margins and higher credit costs in the Caribbean dampened overall results. Nevertheless, this offshore business has great potential.

We should see cash earnings of about $5.50 a share in 2014 and as much as $6 next year. The stock looks very attractive at current levels. Scotiabank is a Buy with a revised target of $80.

TD Bank (TSX:TD) (NY: TD)

TD Bank reported third-quarter earnings of $1.15 a share, comfortably beating the $1.10 consensus forecast. All of the bank's operating divisions contributed but Canadian retail was particularly strong.

This domestic segment, which includes some wealth management and insurance, turned in a profit of $1.4 billion, up 54% year-over-year. Business lending growth remained strong at 11% and credit card business surged 26% over 2013.

As one analyst put it, this was a quarter when virtually all the bank's moving parts functioned well. Overall, the fundamentals are solid and likely to improve as the US economy continues to gain strength.

Earnings of $4.50 a share are expected this year with an increase to the $4.75 range in 2014. The bank's excellent capital ratio allows room for share repurchases as well as further acquisitions. TD Bank remains our first choice amongst the banks and is a Buy with a revised target of $64.

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