Canadian Banks: Canada's Moment to Shine

Includes: BAC, BMO, BNS, CM, JPM, RY, STI, TD
by: Marc Courtenay

A reputable colleague of mine, when asked if he were going to buy some US bank stocks, told me the following: "The US banks I'd buy currently reflect outrageous valuations, based on earnings power and economic uncertainty."

He said he wants to buy Banks of America (NYSE:BAC) when it gets back to the single digits, JP Morgan Chase (NYSE:JPM) when the stock trades in the low-to-mid $20s and Suntrust Banks (NYSE:STI) if and when the shares retreat to the low teens.

To my way of thinking that is how investors reduce risk. They look for quality, they face the realities such as current valuations and economic conditions, and they wait until the next good market shakeout to accumulate.

For my money, I think another way to reduce risk and even increase potential profits in bank stocks is to diversify among North America's best publicly-traded banks, and I'm speaking about the major Canadian Banks.

There are many good reasons why I say this, but nobody has summed it up better than The National Post ( which recently ran an article written by Colby Cosh entitled "Canada's Moment". By virtue of The National Post's generosity I'd like to quote the heart-and-core of this terrific article. If you are ever considering investing in bank stocks which pay great dividends, print their story out and save it.

"As the U. S. economy approaches what everyone is hoping will be the "inflection point" at which the major indicators rebound, the international fetishization of Canada continues. Enjoy it while you can! -- apparently, like some crotchety pioneer grandmother, we have the kind of stoic, hard-ass virtue that only expresses itself fully in a crisis. Everywhere, economists are wondering how Canadian banks managed to avoid most of the crummy securitized debt that is crippling other major democracies' financial institutions. And they're noticing that our big lenders held up pretty well through the Great Depression, too. It is our moment; but do we know exactly what advice to give others?...

Down south, lenders are engaged in a constant chess game with the government. Here, the bank executives and the regulators have absorbed each other's values to such a great degree -- both taking the view that, to put it simply, the first goal of the Royal Bank (NYSE:RY) is to make sure that there is still a Royal Bank 100 years from now -- that internal audit procedures are tougher than any regulator would dare demand, and arguably more effective than any regime created solely by a narrow, politically shifting rule set. Plain old-school snobbery plays a role too. Only by means of a very powerful ethos of noblesse oblige can you staff a modern banking system, as we have, without dangling big short-term rewards in front of top executives and doing away with substantive board oversight.

Unfortunately, it's not going to be easy for any foreign institution to import Canada's banking culture without having had Canada's history. But, hell, they could at least adopt some of the maxims. Toronto-Dominion's (NYSE:TD) CEO told Marie-Josee Kravis that he pulled the TD out of the game of buying securitized-debt products years before the crisis, for one simple reason: Those instruments had become utterly inscrutable. "If I cannot hold them for my mother-in-law," he said, "I cannot hold them for my clients." Given the in "-in-law" part, that's not setting the conscientiousness bar very high -- but it is higher, at any rate, than where many foreign institutions put it over the last decade."

Other than Bank of Nova Scotia (NYSE:BNS), Canadian Imperial Bank of Commerce (NYSE:CM) and Bank of Montreal (NYSE:BMO), I'm not aware of sixth "national-scale retail bank" in Canada but that could be because it isn't publicly traded?

The fact that Canada had no banks fail during the Great Depression and that it is a fact that the Canadian banking system ranks as one of, if not the best in the world, should provide investors with a measured amount of comfort. Buying them during the next "bear market retreat" will enhance your dividend yield as well.

Disclosure: I don't currently own any of the bank stocks mentioned in this article.