​Top Trio of Canadian Banks

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Canada's second-quarter GDP posted a blowout number of 4.5% annualized growth with the economy displaying strength on virtually all fronts, says Gavin Graham, contributing editor to Internet Wealth Builder.

Against that backdrop, it was not surprising to see the Bank of Canada raise its key rate by another quarter-point, to 1%. Another rise in interest rates this fall seems certain.

One group of companies that stands to benefit from a rise in short-term rates is the chartered banks. As investors and savers are well aware, the interest rate charged on borrowings always seems to go up faster than that paid on savings. That has the effect of widening the banks' net interest margins, the major source of the banks' profits.

The three-generation lows in short-term interest rates over the last few years have been a major handicap to the banks, although given their comfortable oligopoly compared to the much more competitive U.S. market, Canadian banks are still making lots of money.

RBC (RY) is Canada's largest bank and continues to benefit from its market-leading positions in mortgage and commercial lending. It also has a strong investment banking performance as well as a rapidly growing asset management business.

The dividend was raised by $0.04 per quarter (5%) to $0.91, the second increase in this range this year.

That gives RBC a yield of just over 4%. Whenever RBC has seen its yield top 4%, apart from the financial crisis of 2008-09, it has proven worth buying.

It seems anomalous that the largest and most profitable bank in the country sells at a notably higher yield than its smaller competitors. RBC remains a Buy for its strong capital, market-leading position, and increasing presence in wealth management.

TD Bank (TD) is Canada's second-largest bank, with a large U.S. retail presence, as well as owning 82% of discount broker TD Ameritrade. It has particular strength in retail banking although it also has a strong presence in wholesale banking.

The dividend payment remains at $0.60 a quarter, after the 9% increase in March, giving TD a yield of 3.6%. TD remains a Buy for its growing U.S. presence, strength in Canadian retail, and professional management.

Bank of Nova Scotia (BNS) is the most international of Canada's Big Six chartered banks, with over 40% of its earnings derived from its extensive Latin American and Asian operations. It is the sixth largest bank in Mexico and the third largest in Peru. It has a reputation for having the lowest expense ratio of any of the banks.

Scotia remains a buy for its extensive international exposure to the less banked and faster growing Latin American and Asian economies, its strict cost controls, and its growing wealth management division.

Gavin Graham is contributing editor of Internet Wealth Builder.

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