I am retired and take educated guesses on all things financial.

November 07, 2006

November 8, 2006: Elections, Income Trusts, Canadian Banks

As this is written, the elections have not been declared over. Looks like a mixed bag. Not all the Democrats wanted, a wakeup call for Republicans that they should not take their electorate for granted. Gridlock will prevail, even with last minute surprises overnight.

Canadian Income Trusts have been delivered a blow. Several readers e-mailed me with questions/comments about my recommending Canadian Banks as a winner in this situation. I have done a bit more research on this topic. Here are my findings:

1. Domestic retail banking is still very importantly Canadian banks. Earnings derived from retail operations and wealth management will represent over 65% of aggregate earnings for the six largest banks in 2006, up sharply from 51% in 2004.

2. The six largest banks consider retail banking a "growth business". Net earnings are up 13.8% from 2003-06 annually.

3. The current environment in Canada is more favorable than the US. Credit quality is excellent, economic and consumer data is positive, as is management sentiment.
There is no interest margin compression.The economic cycle is robust with no end in sight.

The two banks that one of my favorite analysts likes are TorontoDominion Bank (TD) and the Royal Bank (RY) owing to the scope and size of their existing retail platforms, their willingness to expand into new product segments, and the state of some of their competitors.

The Bank of Montreal has some problems and I believe is a weak sister to the top six banks at this writing.

Toronto Dominion and the Royal Bank of Canada appear to be going after wealth management in a big way. The Bank of Nova Scotia, which will be opening approximately fifty new branches in Alberta (western Canada) and adding to their wealth management personnel is competitive. The Canadian Imperial Bank of Commerce will become a more effective player in time.

If you are going to buy stock, I recommend (again) the Bank of Nova Scotia. You will also do quite well in a safe environment putting money to work in the stocks of Toronto Dominion and the Royal Bank of Canada.Both may well experience a 20% return over the next twelve months, plus dividends and a modest currency hedge against the US dollar.

If you have detailed questions on this topic, I have quite a bit of information to share.

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