2 Canadian banks to buy for growth and income

Canada’s two largest bank stocks, Royal and T-D, continue to rack up impressive earnings-per-share (eps) growth. Both of these blue chip financial stocks are rated buy for growth and income.

Canadian_BanksRoyal Bank’s adjusted earnings for the third quarter were $1.89 a share. That figure topped the analysts’ consensus estimate by $0.02 a share, and it was up eight per cent from the third quarter of last year.

Royal Bank of Canada (TSX—RY; NYSE—RY) is Canada’s largest bank by market capitalization.

The third-quarter results have supplemented what has been a good fiscal year for the bank. For the nine months ended July 31, 2017, Royal Bank made $8.4 billion (adjusted), or $5.53 a share, compared with $7.7 billion, or $4.97 a share, in the same period of 2016.

With the release of the third-quarter results, management announced a 4.6-per-cent increase in the quarterly dividend to $0.91 a share.

Assuming the correction in the housing market continues to be a healthy one, the Canadian banks stand to benefit from rising interest rates.

The stock trades at a reasonable 12.3 times Royal Bank’s projected fiscal 2017 (ends October 31) earnings of $7.52 a share. The annual dividend of $3.64 a share yields 3.9 per cent.
                                                     
Royal Bank is a buy for growth and income.

TD’s US retail revenue growth outpaces Canadian growth

TD Bank (TSX—TD; NYSE—TD) reported impressive results for its third quarter. The bank’s adjusted earnings per share, or EPS, were $1.51, up 18.9 per cent from $1.27 in the same quarter of last year. Analysts had expected the bank to post growth of just seven per cent, as the consensus called for EPS of just $1.36.

The increase reflected good revenue growth, lower insurance claims and lower provision for credit losses. Revenues rose 6.7 per cent to $9.3 billion, reflecting a 7.0-per-cent increase in net interest income and a 6.4-per-cent increase in non-interest income.

The bank’s EPS growth for the first three quarters of fiscal 2017 was not as strong as its third-quarter performance. But it was impressive nonetheless, with EPS up 14.8 per cent year over year.

TD Bank is attractive as an investment partly because its US exposure should help offset any setbacks that may occur in Canada. Revenue growth at the US retail segment has certainly outpaced growth at the Canadian retail segment so far this fiscal year. And we expect that to continue for at least the next couple of years.

Meanwhile, further efficiency improvements in both the Canadian and US segments would also help with earnings growth. TD managed to limit the increase in non-interest expenses to four per cent in the latest nine months, improving its adjusted efficiency ratio to 53.4 per cent from 53.6 per cent (lower is better).

TD should earn $5.42 a share in fiscal 2017 (ends October 31). The stock trades at a reasonable 12.4 times that estimate. Its annual dividend of $2.40 a share yields 3.6 per cent. TD is Canada’s second-largest bank by market capitalization, and the sixth-largest bank in North America by branches. TD Bank is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the September 2017/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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