Canada's big banks have been headed in the right direction for decades on end.
In early November, I published this article on the very successful One Stock Portfolio. The portfolio, or stock, returned some 2,274% from 1996 to present. That's above a 20% annual return. Many, many "investors" have participated in this one-stock approach, and have certainly enjoyed turning $10,000 into $227k in just 17 years.
The Portfolio is Royal Bank of Canada (eh), and while it was an article that started with the example of many Royal Bank employees who simply held on to their company stock and options - it was more of a story on Canadian banks. And of course, the Canadian banking sector is dominated by the big five of The Royal Bank of Canada (NYSE:RY), Scotiabank (NYSE:BNS), Toronto-Dominion Bank (NYSE:TD), Canadian Imperial Bank of Commerce (NYSE:CM), BMO Financial Group (NYSE:BMO).
Canadian banks are in a very unique position. That was demonstrated recently through the financial crisis when the Canuck banks came out of the recession stronger than any banking group on the planet. And again, you can read the "why" and how in the article link above.
And while many think that the Canadian banks are headed for a fall due to a Canadian housing bubble similar to that suffered in the U.S., I say poppycock. And you can read the poppycock rationale in this article here.
So it's time to check in on the One-Stock Portfolio and Canadian banks as we move into 2013 - as the banks did enjoy another prosperous earnings season in December. And in fact, Royal was batting lead-off this year.
The Royal Bank of Canada
Fourth-quarter profit at Canada's largest bank rose 22 per cent to C$1.9 billion. Those figures compared to a year-earlier profit of C$1.6 billion. For the year, the bank notched record profit of C$7.5 billion, up 17 per cent from 2011.
BMO Financial Group
For the fourth quarter, BMO reported a net profit of $1,082 million up from $768 million. BMO's revenue in the fourth quarter from all business segments totaled $4.18 billion, up from $3.82 billion in the fourth quarter of 2011. For the year, BMO had net income of $4.189 billion, up $1.075 billion or 35% from 2011.
Scotiabank had $1.5 billion of net income for the fourth quarter, a 31 per cent increase over the same time last year that took Scotiabank to a record annual profit. For the 2012 financial year, Scotiabank made $6.46 billion, an increase of 21 per cent, the highest annual income it has recorded.
Canadian Imperial Bank of Commerce
CIBC earned $852 million in the fourth quarter, an increase of nearly $100 million from the same time last year. The fourth quarter brought the total net income for the year to $3.3 billion, before adjustments - up $400 million from last year. Revenue for the full year totaled $12.55 billion, up from $12.44 billion.
The Toronto-Dominion Bank
Toronto-Dominion Bank was essentially flat in Q4. TD reported it had $1.6 billion of net income in the fourth quarter. For its full financial year, TD earned $6.47 billion on $23.12 billion in revenue. That compared with a profit of $6.05 billion on $21.66 billion in revenue in the prior year.
Some very solid numbers all around, and during trying or at least tepid economic circumstances. Canada's big banks dominate within an oligopoly environment. They have pricing power. They operate in a very sensible and stable regulatory environment. And they have tons of cash on hand to handle a housing downturn, should that arise. And even though they've held up and gone on a nice run, the PE ratios of the big banks are still very sensible.
Canada's banks are also in a sweet spot as they can benefit from a recovery in the U.S. (Canada and the U.S. enjoy the largest trading arrangement on the planet). And Canada being rich in oil and potash and other resources can continue to profit from the robust growth in developing nations. As Canada goes, so goes Canada's big banks.
Not only that, U.S. investors who scoop up a few Canadian banks will add what may turn out to be much needed currency exposure. While the U.S. still has no plan to eliminate its deficit in the next decade or more, Canada sits atop the list for favorable debt-to-GDP ratios among G7 nations. The deficit to GDP is under 3%, and the current government plans to eliminate the deficit within 3-4 years. We'll find out if that is wishful thinking. But at least they're using the word "eliminate."
The U.S. dollar may continue to fall against the Canadian Loonie. U.S. investors would have picked up a very sizeable currency premium had they been invested in Canadian banks over the last decade, even a 25% premium over the last 3 years alone.
For a solid investment story that hasn't changed, plus portfolio and currency diversification, U.S. investors just might want to look North at Canada and its big banks. But how long it will take for Royal to make the next 2,274% is anyone's guess.
I'd be more than happy if I had to wait 20 years.
Additional disclosure: Please note that Dale Roberts aka cranky, the crankywriter, the scaredy cat investor is not a licensed investment advisor, and the above opinions should only be factored in to an investor's overall opinion forming process. Consult a licensed investment advisor before making any investment decisions. Pretty please.