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We’ve covered the fortunes and the stocks of big banks and community banks, but last week we got a look at another banking sector: Canadian banks. They did pretty well, under some tough conditions, and if you’re looking for some stocks with strong growth potential, you might want to look north.
Here’s the bottom line. Fourth-quarter net income rose 13% at Bank of Montreal (NTSE: BMO), 11% at Royal Bank of Canada (NYSE: RY), 28% at Bank of Nova Scotia (NYSE: BNS) and 5% at Toronto-Dominion Bank (NYSE: TD). One exception to this generally strong Canadian bank earnings trend was Canadian Imperial Bank of Commerce (NYSE: CM), which recently reported a 4% decline in quarterly net income.
So is there a place in your portfolio for these strongly performing Canadian banks? Here are some things to consider:
- Canadian banks performed well in a tough business environment. Soft oil prices may have benefited consumers, but they have hurt a key Canadian industry. The Canadian economy fell into recession earlier this year after two consecutive quarters of contracting gross domestic product.
- In this environment, these banks managed to grow their bottom lines by cutting costs and pursuing a diversified growth strategy. Bank of Montreal, for instance, showed particularly strong growth from U.S. operations, which helped offset a loss at its corporate services business. Royal Bank of Canada said that strong growth in its personal and commercial banking business offset a decline in its wealth management segment.
- Most of these Canadian banks pay dividends. Some, including Toronto Dominion and Bank of Montreal, announced increased dividends when they reported earnings.
- These Canadian Bank stocks are trading at levels that appear to be depressed. Bank of Nova Scotia is down 22% year-to-date; Toronto-Dominion is down 14%. Considering that the current Canadian recession is considered a relatively shallow one, these banks – which have already cut costs – could be positioned to grow when the economy rebounds. Bank of Nova Scotia, for example, has cut more than 1,000 jobs since the summer.
- Canadian banks represent an often overlooked financial services sector. They aren’t too big to fail like their U.S. counterparts, but they are still large, established players that increasingly have global footprints. They’re a way for investors to diversify their financial services investments without venturing into areas that are too risky.
But to be clear, these stocks are not without risk. The Canadian economy as a whole is less diversified than that of the U.S. or other major economies, which means that these banks may be more vulnerable to a prolonged slowdown in the oil industry. These concerns are real and seem to be what is keeping so many investors on the sidelines.
Yet it’s also worth noting that oil is a cyclical industry. Oil prices are likely to eventually move higher again. The fact that these Canadian banks can do so well in a weak oil price environment bodes well for how they’ll do in a stronger economy.
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