Canadian banks to take on volatility

By all indications, the ongoing volatility that has rattled global stock markets over the past few weeks is likely to persist. A slew of negative macroeconomic indicators including a weakening global economy, the China virus epidemic, political events and trade wars are forcing Canadian investors to retreat to their own backyards for opportunities.

Meanwhile, the Canadian economy is boasting a better growth outlook than other developed markets . The time may be right for investors to fortify their portfolios with homegrown options. And the Canadian banking sector, one of the strongest pillars of the nation’s economy, looks like a particularly attractive place to hide during market volatility.

Not only do leading Canadian lenders enjoy a favourable banking environment at home, but their growing market share in the U.S., impressive balance sheets and significant capital buffers also make them compelling all-weather prospects. The following financial juggernauts are well placed in an oligopolistic market structure to weather economic shocks and grow profit while offering dividends that are nothing to sniff at. The Toronto-Dominion Bank Forward P/E: 10.78 Canada’s leading bank, Toronto-Dominion ( TD ) operates three business segments including Canadian retail banking, U.S. retail banking, and wholesale banking. The bank owns a 42% ownership stake in U.S.-based discount brokerage TD Ameritrade.

Toronto-Dominion is one of six leading Canadian banks that collectively hold roughly 90% of the nation’s banking deposits. “The bank derives approximately 60% of its revenue from Canada and 35% from the United States, with the rest from other countries,” says a Morningstar equity report, noting the bank has done a particularly admirable job on its Canadian retail operations where it holds leading market share for most key products.

The lender, which has roughly $350 billion in Canadian assets under management, is the number-one card issuer in Canada and is positioned to maintain its dominance for years to come.

Toronto-Dominion also boasts a significant presence stateside where it has more branches than any Canadian bank. While the company has a higher exposure to more growth in the U.S., “it has much lower returns on equity for banks on average than Canada,” partially due to acquisition costs, cautions Morningstar equity analyst Eric Compton.

TD’s sustainable competitive advantage, or wide moat, is built on factors including the best deposit mix, leading market share in Canada, moaty nonbank businesses, and the favourable Canadian banking environment, says Compton, who recently raised the stock’s fair value from $81 to $82. Royal […]

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