Many investors are turned off to the idea of U.S. financials. There’s a laundry list of recent scandals at big banks, including money laundering at HSBC Holdings (NYSE:HBC), Britain’s largest bank, the “London Whale” at JPMorgan Chase (NYSE:JPM) and Barclays PLC (NYSE:BCS) manipulating a key interest rate known as LIBOR.
Then, of course, there are the share prices. After surging to start the year, the vast majority of banks are down double-digits since mid-March, with the benchmark Select Sector Financial SPDR (NYSE:XLF) down about 5%.
Clearly the big banks are suspect … but our neighbors to the north aren’t doing too badly. If you’re looking to play the financial sector with a little less risk, then perhaps sleepy Canadian banks with big dividends are worth a look. Five of the largest and most well-heeled Canadian financial stocks trading in the U.S. on the NYSE are:
- Royal Bank of Canada (NYSE:RY): $74 billion market cap, 4.3% yield
- Toronto-Dominion Bank (NYSE:TD): $72 billion market cap, 3.6% yield
- The Bank of Nova Scotia (NYSE:BNS): $60 billion market cap, 4.1% yield
- Bank of Montreal (NYSE:BMO): $37 billion market cap, 4.9% yield
- Canadian Imperial Bank of Commerce (NYSE:CM): $30 billion market cap, 4.8% yield
These banks are not without risk. Recently S&P cut its outlook for a number of banks, including Canadian institutions. And as InvestorPlace.com writer and Canadian resident Will Ashworth wrote recently, consumer debt and a shaky housing market raise serious concerns north of the border. Investors know first-hand how painful a downturn in residential mortgages can be for financial stocks.
But there are a few good reasons to look to Canadian banks, too. While most are just tracking the market right now, they might be a good place to look for dividends or for a secular recovery in 2013.
They Are Akin to U.S. Regional Banks
Consider that some of these five Canadian megabanks are significantly smaller than some U.S. regional banks.
U.S. Bancorp (NYSE:USB) has a $60 billion market cap, for instance — double Canadian Imperial. And PNC Financial Services (NYSE:PNC) is worth $32 billion with about $270 billion in assets and about 2,900 branches. Canadian Imperial has just 1,070 branches across Canada.
This smaller size actually is a plus for many investors. After all, the problem of JPMorgan’s crazy traders in London doesn’t exist at a bank that focuses mainly on commercial and residential banking. Also, smaller size means there still is room to grow, either by buyouts or expansion.
Click to Enlarge The strength of regional banks vs. the big “Too Big To Fail” financial monstrosities is clear to investors. Just consider the performance of the SPDR KBW Regional Banking ETF (NYSE:KRE) — which boasts top holdings in Regions Financial (NYSE:RF), KeyCorp (NYSE:KEY) and Texas Capital Bancshares (NASDAQ:TCBI) — vs. the big-bank-focused XLF fund. The regional KRE fund is up 15% in the last 24 months vs. a flat XLF, and up 23% in the past 12 months vs. 14% for the big-bank ETF.
If you like regional banks, you should consider Canadian financials, too. Here’s why: