The banking industry in North America is very different than it was just a few years ago. Banks are well capitalized and prepared for tough times, efficiency is improving as mobile and digital banking technologies emerge, and rising interest rates are giving bank profits a boost.
However, the banking sector has performed exceptionally well over the past year, so it can be tough to find attractively priced bank stocks in which to invest. Despite the gains, here are three that could still have plenty of upside potential in 2017 and beyond.
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|
Company |
Symbol |
Recent Share Price |
Dividend Yield |
|---|---|---|---|
|
Bank of America (BAC 1.70%) |
BAC |
$29.90 |
1.25% |
|
Toronto-Dominion Bank (TD 0.61%) |
TD |
$51.56 |
3.62% |
Data source: TD Ameritrade. Share prices and dividend yields current as of 7/19/2017.
An outstanding second quarter that barely moved the needle
Bank of America recently became a major holding of Warren Buffett's Berkshire Hathaway following the approval of the bank's 2017 capital plan. In addition to a higher dividend and aggressive buyback plan, as well as the addition of the Oracle of Omaha as the bank's largest shareholder, Bank of America's performance has given shareholders several other reasons to smile.
During the second quarter, Bank of America beat analysts' expectations on the top and bottom lines, had fewer charge-offs than expected, and grew its deposit and loan portfolios by 4% and 5%, respectively, over the past year.
Finally, Bank of America has done a fantastic job of controlling expenses and increasing the efficiency and profitability of its operations. Mobile and digital adoption has been impressive, and the bank has closed almost 500 branches in order to streamline its operations.
To be clear, there is still some room for improvement. The bank still isn't at the industry's profitability benchmarks of a 1% return on assets and 10% return on equity, but it's certainly getting there. For the second quarter, the bank reported ROA of 0.93% and ROE of 8%, an improvement from 0.88% and 7.4%, respectively, a year ago.
Despite a great quarter and improved profitability, Bank of America's stock price didn't move much. In fact, as I write this, the bank still trades for a discount to its $24.88 book value.
A Canadian dividend machine with room to grow
I've said before that Canadian banks are very different from U.S. banks. As my colleague John Maxfield pointed out in a 2016 article, while the U.S. has had 14 banking crises over the past 180 years, Canada has had just two -- and the last one was in 1839.
Because of their relative stability, many Canadian banks have been fantastic dividend investments. For example, my personal favorite Canadian bank is Toronto-Dominion Bank, better known as simply "TD Bank," which has paid dividends for 160 years in a row.
TD is the fifth-largest North American bank by total assets and has 2,413 retail branches throughout Canada and the U.S. About half of the bank's deposits are U.S.-based, but TD's loans and assets under management are mostly in Canada, as of 2017. About 60% of the bank's earnings are from its Canadian operations. In fact, TD is the largest Canadian bank in terms of total assets and deposits.
While TD is a large bank, it has significant room to grow, which is perhaps my favorite thing about the bank from an investor's perspective. TD only has a physical presence along the East Coast, leaving it tons of room to expand across the U.S.
Over the past 10 years, TD has grown significantly, both organically and through acquisitions. Shareholders have achieved 10.5% annualized total returns over the past decade (including the financial crisis) -- triple the North American big-bank average. And for income investors, TD has grown its dividend at an 11% annualized rate since 1995, with no cuts during the financial crisis. How many major U.S. banks can say the same?
