It's Hard to Go Wrong With Canadian Banks

Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Canadian banks are safe organizations because they have a lot of capital to justify your investment, U.S. banking analyst Meredith Whitney told the Business News Network. However, a few U.S. hedge funds have actually shorted Canadian banks. 

So, is now a time to put your money in Canada? After all, Canada's banking sector is heavily regulated, and free from much of the recession-related turmoil and utter hatred still targeted at many of the American banks. Let's take a look at what the top three Canadian banks have to offer, and where they fail.

RBC weighted heavily on investment banking

Royal Bank of Canada (NYSE: RY) is the country's largest bank and boasts of $86 billion in market capitalization. The bank operates in the broadest geographical area, and covers many banking-related needs, such as wealth management, securities trading, and insurance. The company had a net interest income after loan loss provision (bank revenue) of over $11 billion last year, which is an increase of over 30% from 2009 when it had just over $8.5 billion.

The bank expects increasing demand for loans due to the financial recovery. That's an area that makes up a major part of the company's revenue. Investment banking accounted for 23% of the firm's income last year, and that's set to rise. In fact, the bank is already experiencing a decrease in nonperforming loans and an increase in loan loss reserves. That is a surefire indication that the bank is being paid back, with interest in hand. With that in mind, investors also need to consider the low interest rates that affect margins. However, RBC has managed to average 17% annual returns over the last 10 years.

BNS looks to grow abroad

Emerging markets is the name of the game for The Bank of Nova Scotia (NYSE: BNS). The company (which is also referred to as Scotiabank) boasts of exposure to India, China, and Brazil. In fact, international exposure represented 18% of the firm's earnings growth last year, and 50% of the profits came from overseas. Net interest income after loan loss provision was $8.7 billion last year and $6.5 billion in 2009, representing 33% growth, 3 percentage points higher than RBC. 

The firm has been growing at a fast pace, with an aggressive acquisition strategy that aims to diversify the company, an area that it lacks when compared to RBC. The majority of that diversification has been in several countries, though each investment is relatively minor compared to RBC's activity. When it is in each of these countries, it waits for an acquisition opportunity, which doesn't always pay off. For example, if a country nationalizes foreign banking assets, BNS could get burned, which is exactly what happened about 10 years ago in Argentina.

Scotiabank is also diversifying digitally after its recent acquisition of ING Bank of Canada's online banking operations. That increased CAD $40 billion of assets and CAD $30 billion of deposits, including 1.8 million customers. This allows the bank to cross sell its products and services, and shows a tremendous amount of growth for its share price.

BMO gives back to shareholders

Those focusing on yields should turn to Bank of Montreal (NYSE: BMO). The firm offers a yield of just under 4.7%. In fact, the bank pays its shareholders around 45% of earnings. The dividend has grown 9% in the last decade. The net interest income after loan loss provision was over $8 billion last year, and while it is lower than the two aforementioned banks, it is an increase of about 100% from 2009 when the number was just under $4 billion.

The company isn't exposed outside of North America, as it currently splits operations between the United States (30%) and Canada (70%). However, the company is expanding its U.S. operations fast, and in 2011, it doubled its American exposure with the purchase of Marshall & Ilsly. The company is a safer purchase for those not bullish on the profitability of developing nations. Also, with hard feelings permeating in the American banking sector, a firm boasting the name of a Canadian city (and an air of stability) could catch on quickly. This will likely allow the bank to gain market share in the United States.

Which bank to go with...take your pick

RBC stands out as a Canadian bank for the safe investor. The firm is large enough to withstand disappointing starts in Asian countries, but as it strengthens its hold there, operations will become more efficient. The Bank of Nova Scotia and Bank of Montreal have shown considerable growth since the recession, and with the banking sector in Canada considered one of the strongest in the world, it's difficult to not win with any of these highly regulated, safe investments with huge potential upside.

 

Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.


Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends The Bank of Nova Scotia (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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