4 Big Canadian Banks To Consider

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From time to time, I like to check in on large banks to our north, in Canada. These banks have generally avoided many of the credit related problems that befell large American banks late last decade. But there are some concerns up north. For the fourth time since 2008, this summer the Canadian government has mandated tightened qualifications for mortgage borrowers. There is concern both over the household debt carried by Canadian citizens, and a real estate bubble, particularly in the well-developed urban areas of Vancouver and Toronto. In this article, I will examine the big Canadian banks, all of whom have strong capital levels and high dividends compared to their American peers, to see how they are coping with these threats.

My favorite Canadian bank for the past year had been Bank of Montreal (NYSE: BMO), Canada's fourth largest bank. The reason it stands out to me is it has the largest American presence among Canadian banks, and much of that American presence was acquired on the cheap in 2011, when Bank of Montreal purchased Milwaukee's Marshall and Ilsley. That purchase for a mere $7.75 per share, was exquisitely timed to coincide with Marshall and Ilsey putting its worst days behind it. Now, Bank of Montreal is enjoying the turnaround of the Midwest bank.

Bank of Montreal's core banking unit though is under stress, and Moody's recently placed many Canadian Banks, including Bank of Montreal on its “Watch List” with negative implications for the Banks' credit ratings. Bank of Montreal's fiscal 2012 ended October 31, and earnings came to an even $6.00 per share, as the bank exceeded analysts’ expectations in each quarter of the fiscal year. Fiscal 2011 earnings were $5.26 per share, meaning 2012 earnings were up by 14%. Bank of Montreal management has also announced a plan to buy 15 million shares of its stock, at a cost of roughly $900 million based on the December, 2012 average price of the stock. But earnings are likely to struggle to advance in 2013 with the Canadian economy, outside its energy industry, even more lethargic than the United States'. The 4.8% dividend yield is appealing, but don't expect much more than that dividend over the next twelve months.

My new favorite Canadian bank going forward is the country's largest bank, Royal Bank (NYSE: RY), which now has about $835 billion in assets. In its fiscal year, also ending October 31, it reported earnings of $7.54 billion, or $4.93 per share, up 17% from the 2011 total. Aiding that robust profit growth has been a string of acquisitions, including in October struggling Ally Bank's (ALLY-PB) Canadian assets for a purchase price of $4.1 billion.

Looking ahead, I see better defined profit growth in Royal Bank than I do in Bank of Montreal. Royal Bank management has stated it is interested in acquisitions, perhaps even in the United States, an area it retreated from early in 2012 when it sold its American franchise to PNC Financial (PNC). Royal Bank was the one large Canadian bank not included on the Moody's Watch List, and its top tier credit rating was recently affirmed by Standard and Poor's. Royal Bank pays a 4.3% yield, and most anticipate earnings growth in the annual 10% range over the next few years. For those seeking a quality, big bank with growing income potential, I don't think you can do a whole lot better than Royal Bank.

Bank of Nova Scotia (NYSE: BNS) is Canada's third largest bank, with assets of about $680 billion at the close of its fiscal 2012. Overall, 2012 was dominated by Bank of Nova Scotia's purchase of ING Bank of Canada, which at the time was Canada's eighth largest bank.  While the purchase price was $3.1 billion, Bank of Nova Scotia will be absorbing about $1.2 billion in excess cash above capital requirements that ING Canada carried on its balance sheet at the time of the sale.

Bank of Nova Scotia carries a generally more conservative posture toward loan quantity and quality than its peers. For that reason, if in fact the retail side of the Canadian economy takes a hit in 2013, Bank of Nova Scotia will likely outperform its peers. It is also Canada's most international bank, with offices in 55 countries. That too will help if the Canadian economy weakens. But those advantages did not prevent Moody's from putting Bank of Nova Scotia on the Watch list.

Earnings wise, 2012 was such a fabulous year, 2013 might struggle to match it. 2012 earnings came to $6.5 billion, or $5.22 per share. Adjusted for one-time factors, earnings came to $4.77 per share, compared with $5.18 billion, or $4.62 in 2011. Analysts had expected 2012 adjusted earnings of $4.74 per share in 2012. This is another bank that should be chugging along with roughly 10% growth. It pays a four percent annual yield, which is the only reason I do not view it as highly as Royal Bank.

National Bank of Canada (NTIOF) is the country's sixth largest, with about $178 billion in assets. Like all the other banks here, its fiscal 2012 continued the trend of solid performance over the past several years. In particular, adjusted 2012 earnings came to $1.4 billion, or $7.86 per share, a nine percent jump from the $7.18 reported in fiscal 2011. Much of that earnings growth was late in the fiscal year, when adjusted profits of $1.93 for the 4th quarter were up by 15% from the fourth quarter of fiscal 2011.

National Bank just raised its dividend to $0.83 per quarter, for a yield of 4.3%. Analysts see lower growth in National Bank than its Canadian peers. I, on the other hand, have more faith in the power of the Canadian economy than do most, and see earnings growth approaching 10% annually, or just a tick below some of the other banks. On a comparison basis therefore, this, despite being a fine choice for many conservative investors, does not have either the growth prospects, or the income, of other, better choices above.

StockCroc1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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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