Canada's Banking Stocks Should Be Among First to Recover

 |  Includes: BMO, BNS, CM, RY, TD
by: Markham Lee

For various reasons I've never been too keen on writing one of the ubiquitous "10 reasons why stock ABC is going to $50.00" articles, primarily because I like to provide unbiased information in terms of not having an interest in the companies I'm writing about. Hence the reason my articles tend to revolve around the companies I don't want to invest in, as opposed to the companies I actually trust with my money.

Still, there is something to be said for sharing the areas that I'm currently researching and at least pointing my readers towards the companies I like. So I'm going to start posting "Investment Ideas" in terms of discussing broad sectors or groups of companies I'm interested in, and briefly discussing the reasons why I'm considering investing in a particular sector, company, etc. I think it's a happy medium from writing explicit celebrations of the companies in my portfolio, and sharing some good ideas as well.

For the first go round I figured I'd look towards our northern neighbors for some investment ideas:

Canadian Banks: to be sure it's getting to the point in the financial sector where you could argue that any bank that isn't losing money and/or isn't in need of cash infusions from the government, private investors, etc., is a potentially good investment. It's a simple case of placing your money with the people who made the fewest mistakes during the credit bubble, because chances are they're going to be the ones to recover first/the fastest.

The banks of our Canadian neighbors are a good example of this as they have quietly fared considerably well during the recent crisis, as was discussed in a recent Bloomberg article:

(From "Canadian banks have remained profitable, outperforming their peers, because of tighter government restrictions on lending and capital requirements. The country’s six biggest lenders reported less than C$20 billion ($15.7 billion) in debt-related writedowns since the credit crisis began in 2007, about 2 percent of the $887.1 billion recorded by banks and brokerages worldwide...

...While New York-based Citigroup Inc. (NYSE:C) lost $17.3 billion in the fourth quarter, San Francisco-based Wells Fargo & Co. (NYSE:WFC) had a net loss of $2.55 billion and Bank of America Corp. (NYSE:BAC), the biggest by assets, lost $1.79 billion, Canada’s six largest banks were profitable in the quarter ended Jan. 31, and each beat analyst estimates. "

To put those numbers into greater perspectives Citibank wrote down about $18 billion around Q3 of '07, or $3 billion more than Canada's six biggest banks have over the past 2+ years. If that's not a clue to start looking into Canadian Banks as potential investments, I don't know what is.

Especially when you consider that their recent earnings performance is legit, and not the result of bailouts and other chicanery.

But it's not just their overall performance that attracts me to the Canadian Banks, it's the fact that the regulatory environment and Canadian approach to banking have protected them from a crisis that is eviscerating the rest of the world's banks. As a result even though the weakening economy will have an impact on them, they're much better positioned to weather the storm and come out strong on the other side.

As always do your research first and look out for the same warning signs you would with any other banks, still the fact that the Canadian banking sector has held up so well suggests that there are probably some good financial investments north of the border.

Finally the performance of the Canadian banks really needs to be considered as our own nation looks at changing the way we regulate the financial sector. Namely: regulation shouldn't be seen as an impedance to innovation or growth, but as a way of protecting our economy and financial systems. It's a simple choice: do we want to have moderate growth and a financial system that is able to easily weather a crisis, or do we want strong growth and a financial system that falls into disarray when major shocks hit it?

If you ask me the obvious choice is the former because the current crisis has easily destroyed much of the growth fostered by the lax regulation and so called "innovation" of the credit boom.

Sources: "Royal Bank, Scotiabank Climb Ranks as U.S. Banks Fall" -- Sean B. Pasternak, Doug Alexander, March 16, 2009.

Disclosure: while the author didn't own a position in any of the companies mentioned in this article at the time of publishing, he is considering investing in the companies or sectors mentioned in the future. In keeping with the typical rules around investment timing and disclosure, any potential investments would occur 10 trading days after the original publishing date and the position would be disclosed in future articles discussing the relevant companies. The ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.