Go Canada for Your Banking Buys

When investors think of growing economies, they typically think of countries like China and India. However, you only need to look to the north to find robust economic growth. That's right; Canada -- land of Mounties and polar bears -- is experiencing blazing hot growth that threatens to melt the polar ice caps faster than global warming.

How did this happen, eh?
With all the focus on the U.S., everyone assumed that its neighbor to the north was also suffering from a prolonged recession. Yet, while the U.S. stumbles along with its so- called recovery, Canada is going strong. The Canadian economy grew at a 6.1% annualized pace in the first quarter of 2010, putting its neighbor to the south to shame.

Home to an abundance of natural resources, Canada has made the "old economy" look cool again. It is the fourth-largest exporter of oil and a major exporter of metals and minerals. Oil sands, harvested by companies like Suncor (NYSE: SU  ) and Royal Dutch Shell (NYSE: RDS-A  ) , is also plentiful in this country and profitable when converted to oil. However, Canada is about more than just raw materials.

The real story behind Canada's success lies within the policies that govern the country. Perhaps the most significant is its policy on banking. In stark contrast to their brethren on Wall Street, Toronto financiers are a tame bunch because of strict oversight and regulation of the banking industry in Canada. With less exotic financing of instruments like subprime mortgages or collateralized mortgage obligations, Canadian banks were forced to actually find creditworthy borrowers and maintain more loans on their books. So there wasn't a housing boom and bust up north. Combined with the government's longstanding commitment to fiscal conservatism and competitive markets, the banking policy has ensured that the country's economy keeps churning.

Canada and banking
Now that you've been briefed on its economic situation, let's see one way you can profit from Canada's boom.

As discussed above, Canada's banking system is a veritable fortress of strength in comparison to the United States. Combined with rapid economic growth, it's not hard to see why investing in Canadian banks makes sense. Investors should consider five of the "Big Six" banks, including Royal Bank of Canada (NYSE: RY  ) , Bank of Nova Scotia (NYSE: BNS  ) , Canadian Imperial Bank of Commerce (NYSE: CM  ) , Bank of Montreal (NYSE: BMO  ) , and Toronto Dominion Bank (NYSE: TD  ) . The sixth, National Bank of Canada, is not traded on U.S. exchanges.

Another reason to consider big Canadian banks is that they all pay solid dividends. Currently, the two highest yielders are Canadian Imperial Bank of Commerce, yielding 5.4%, and the Bank of Montreal, yielding 4.9%. Meanwhile, the rest are paying healthy dividends as well. To further help matters, some banking analysts are estimating that these banks will soon be increasing dividend payouts again in the near term. Assuming the loonie continues to gain value on the dollar, as it has over the past few years, soon enough those yields could look even better.

Expansion phase
The financial malaise in Europe and the United States has created opportunities to expand into new markets for Canadian banks. While somewhat protected from foreign competition at home, Canadian banks are free to take advantage of their crippled or recently deceased financial competition in America and Europe. For example, Royal Bank of Canada is eying investment banks in England, Toronto Dominion Bank recently purchased failed banks in Florida, and the Bank of Montreal has acquired banks in Illinois and Wisconsin. With concerns over sovereign debt still affecting Europe and imminent passage of financial reform in the U.S., there should be plenty of prospects for the "Big Six" to extend their presence beyond their border.

The best of the best
So which one of the "Big Six" is best for your portfolio? Let's take a closer look.

Company

Price-to-Book Ratio

Dividend Yield

ROE (TTM)

Royal Bank of Canada

2.2

3.9%

15.5%

Bank of Nova Scotia

2.3

4%

16.2%

Canadian Imperial Bank of Commerce

2.2

5.4%

16.7%

Bank of Montreal

1.8

4.9%

13%

Toronto Dominion Bank

1.7

3.5%

11.2%

Source: Yahoo! Finance; TTM = trailing 12 months.

While all of the banks have similar price-to-book ratios, Canadian Imperial Bank really stands out as a buy when also considering dividend yield and return on equity. This bank has recently displayed signs of turning the corner after a tumultuous run since 2003 and may be poised for some impressive gains. For those investors looking for more consistency, consider Royal Bank of Canada and Bank of Nova Scotia. Both have a long history of profitability to fall back on.

Looking ahead
As long as the "Big Six" keep to their stringent credit standards while expanding operations to new markets, stockholders will have much to look forward to. With strong growth prospects and the willingness to return cash to shareholders, Canadian banks are good way to invest in Canada's boom time.

More on Canadian stocks:

Fool contributor Gerard Torres does not own shares in any of the companies mentioned in this article. Bank of Nova Scotia is an Income Investor recommendation. The Fool disclosure policy leaves you with minty fresh breath.


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