Why These 5 Canadian Banks Rock


As big American banks continue to regain their strength little by little, their neighbors to the north are enjoying a more robust banking atmosphere. So much so, in fact, that Bloomberg recently noted that Canadian banks are among the most solid in the world.

Conservative banking makes for strong banks
In fact, of the top 22 banks, Canada holds six spots. This is huge, and it makes you wonder how they managed such a feat. Not only that, but banks such as Canadian Imperial Bank (NYS: CM) , Toronto-Dominion (NYS: TD) , National Bank of Canada, and Royal Bank of Canada (NYS: RY) made it into the top 10, while Bank of Nova Scotia (NYS: BNS) and Bank of Montreal (NYS: BMO) filled spots 18 and 22, respectively. By contrast, only three American banks were listed in the top 20. Bloomberg isn't alone in its assessment of these northern banks, either. The World Economic Forum has made special note of Canadian banks' strength four years in a row.

What makes these northern banks so darn healthy? It seems as if a steady diet of risk management, careful lending, and strict regulation does actually yield a stronger banking sector. Not finding the international lending rules known as Basel I stringent enough, the Office of the Superintendent of Financial Institutions of Canada requires its banks to hold back a much larger lump of capital than required by those standards.

Quality counts, too, so three-quarters of Canadian banks' Tier 1 capital must be in the form of equity. These restrictive measures are now lauded and given credit for protecting the nation's banks from the serious problems experienced by American and other banks during the financial crisis.

Interestingly, TD Bank's stellar second-quarter showing has been attributed, at least partly, to its pursuit of American banking business. The bank reported an increase in earnings of 14% from this time last year, as well as healthy loan growth. Much of this can be traced to the bank's strong presence in the U.S., where it currently has nearly 1,300 branches, with more branch openings in the works. Canadians are carrying a heavy debt load these days, so TD sees its loan business decreasing there, but increasing here, where the bank pulls down 20% of its earnings. TD has been reaping the rewards of this U.S. expansion, pulling in a good portion of the American mortgage refinance trade over the past few months.

By contrast, Royal Bank of Canada has pulled back from the U.S. market, after its foray into this country did not pan out. The bank sold its money-losing U.S. business last year after suffering from mortgage loans gone bad, and recently agreed to compensate Massachusetts investors $2.9 million for losses incurred on leveraged and inverse-leveraged ETFs. TD Bank and Bank of Montreal began increasing their visibility in this country at about the same time as RBC left, with BMO snapping up Midwestern lender Marshall & Ilsley and adding the purchase to its Harris Bank section. It's now so cool to be Canadian that the unit has recently been prefaced with a "BMO," replacing the old "U.S."

Despite its failed U.S. venture, RBC has not been doing poorly. The bank showed a 5% rise in profit from a year ago, and revenue from trading was boosted by 26%. The bank recently bought out the remainder of RBC Dexia Investor Services from Banque Internationale Luxembourg for $1.1 billion, which was a drag on its recent earnings report; however, the bank expects the unit to start adding to earnings sometime next year.

Meanwhile, Bank of Montreal turned in a sweet earnings report, easily beating on both EPS and revenue, and reporting a profit increase of 27%. This was despite some shake-ups that occurred at the bank earlier in the year, such as the retirement of its well-regarded head of investment and commercial banking operations. The bank also laid off around 60 employees amid concerns of reduced growth through the rest of the year.

Bank of Nova Scotia is chugging along, despite a 10% decrease in profit, thanks to its expanding business interests across the globe, specifically in Asia and Latin America. The bank has had some issues with mortgages written outside of Canada, but it is strong, which speaks well to CEO Richard Waugh's insistence over 10 years ago that the bank increase its cash cushion over and above that of its banking peers. Canadian Imperial just released earnings results, showing about 6% growth in income from the year prior. Another gem: Just as an example of the Canadian attitude toward financial stability, the bank's Tier 1 equity ratio stands at a tad over 14%.

An investor's dream
Canada has a strong, stable banking system that is not only solid, but solidly profitable. For the anti-regulation crowd who say that too much regulation is bad for the banking industry, here is real-world proof that strict regulation works very, very well. Not only are these banks showing stellar earnings and profits, but they are also growing and expanding at a respectable pace, reaching out to new markets as the domestic lending scene slows. For smart financial investors, looking to the north seems like a beautiful way to go.

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At the time thisarticle was published Fool contributorAmanda Alixowns no shares in the companies mentioned above.Motley Fool newsletter serviceshave recommended buying shares of The Bank of Nova Scotia. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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