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Canada’s Banks Sail into Choppy Waters

By Chad Fraser on March 23, 2017

If you hold Toronto-Dominion Bank (TSX: TD, NYSE: TD), you got an unpleasant surprise on March 10, when the stock plunged 5.6% on the Toronto Stock Exchange, to C$66. It’s slipped further this week, along with financials on both sides of the border.

The trigger for the March 10 decline was a CBC News story reporting that, in order to meet aggressive sales targets, TD employees used tactics such as upping line-of-credit limits without a client’s knowledge, or moving them into higher-fee accounts.

In response, TD released a statement saying it doesn’t feel the media reports accurately portray its culture, but it will review the concerns raised. The Financial Consumer Agency of Canada says it will also look into business practices across the Canadian financial sector, starting in April.

Since the CBC report broke, staff at the other Big Five Canadian banks—Royal Bank of Canada (TSX: RY, NYSE: RY), CIBC (TSX: CM, NYSE: CM), Bank of Nova Scotia (TSX: BNS, NYSE: BNS), and Bank of Montreal (TSX: BMO, NYSE: BMO)—have contacted the news outlet with stories of similar sales pressures.

To be sure, these reports evoke memories of the scandal at Wells Fargo (WFC). But at this point, the matter appears more limited than the one that hit the U.S. bank on Sept. 8, 2016, and affected some 2 million customer accounts.

Bank Fundamentals Look Solid …

Meantime, the Big Five continue to perform well, with each one recently reporting fiscal first-quarter earnings that topped consensus forecasts, even though low oil prices are still a drag on the Canadian economy, and rock-bottom interest rates continue to squeeze the banks’ loan income.

TD, for its part, reported adjusted earnings of C$1.33 a share on March 2, up 13% from a year earlier and ahead of the C$1.27 analysts expected. Revenue gained 5.9%, to C$9.1 billion.

The bank saw higher net income at all three of its main divisions, including Canadian retail banking (up 4%), U.S. retail banking (up 7% in Canadian dollars), and wholesale banking (up 66%).

TD also hiked its quarterly dividend by 9% (the stock currently yields 3.7% on a forward basis), and management sees adjusted EPS rising 7% to 10% this year.

… But Housing Is a Red Flag

Of course, none of this is to say investors should take this latest news lightly. It’s a developing story we’re paying close attention to at Canadian Edge.

But there’s another story that could brew into a bigger storm for the Big Five: Canada’s housing bubble, the latest report on which was released March 14. The upshot: The price of homes in the Great White North posted yet another record jump in February.

The center of the action: Toronto, where prices soared an average of 23.0%. Hamilton (southwest of Toronto) saw a 19.7% gain. And Vancouver prices jumped 14.3%, though sales dropped 42% from a year ago, an effect widely attributed to the 15% tax on foreign homebuyers the provincial government imposed last July.

A housing correction would hurt all the Canadian banks, which is why we’ve advised handling these stocks with care for more than a year now.

However, as Canadian Edge Chief Strategist Deon Vernooy wrote on March 9, TD is well positioned in relation to its four rivals when it comes to housing, with a conservatively managed mortgage book, of which 50% is insured. It also has more exposure to the faster-growing U.S. economy, with more branches south of the border than north of it.

These are two reasons why TD is the only Big Five bank we’ve kept in our Canadian Edge Dividend Champions Portfolio. You can get our latest recommendation on the stock—and the 26 other members of this portfolio—when you  start a no-obligation trial of Canadian Edge now.


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