Canadian Banks A Must Buy

Ironically, the best place to put your money is in the banks. It just so happens it's in the bank stock and not your bank account.

Canada's big five released record earnings amid a difficult macroeconomic environment proving that Canada's financial system is deserving of its number one rank in the world. With Europe still in turmoil and American banks fighting for one last pulse, cough Citigroup (C), cough Bank of America (BAC), it is a great to see our banks create massive profits in a heavily regulated system. Management has been pleased and has shown confidence in the system and all five banks raised dividends, which should please investors too.

The fundamentals for Canadian banks have always been strong even through the credit crisis. I remember buying shares of Bank of Montreal (BMO) below $30 in 2009. My regret was selling it a year later, but I digress. The strength of the banks should be a strong reason to buy any one of these companies, since competition in Canada is limited to just a few. And as fees re-enter the banking world in Canada and interest rates remain low, expect profits and margins to be maintained at these levels.

This should lead to rising share prices too. I consider them to be undervalued by at least 15 per cent based on current growth projections and current prices. Two of the five banks have a P/E below 10 and no bank is trading above 12. Dividend yields are more enticing than a 10-year bond. Four banks are yielding more than 4 per cent. For investors looking to generate income, we may start to see capital flow into Canadian banks and away from bonds. This will lead to demand in stock and an increase in price.

The numbers in short:

Name (Symbol)	Price	P/E	Dividend (Yield)
Bank of Montreal (BMO)	$57.62	9.72	2.88 (5.00)
Bank of Nova Scotia (BNS)	$52.90	10.39	2.28 (4.31)
CIBC (CM)	$77.48	10.15	3.76 (4.85)
Royal Bank (RY)	$55.96	11.35	2.40 (4.29)
Toronto-Dominion (TD)	$81.74	11.76	3.08 (3.77)

*Information based on September 6, 2012 close.

Personally, I believe the banks should be priced closer to a P/E of 13 or even 14. They have managed to grow at double-digit rates for a lengthy period of time. Dividends are rising almost annually it seems. They have made acquisitions in key areas of America and overseas which will bolster profits when the world's economy stabilizes. It appears that Canada's bank stocks are positioned finely to climb over the next decade and shareholders should feel that too.

Disclaimer: My household is currently long Bank of Nova Scotia and Bank of Montreal. I do not plan to initiate any transactions in any of the above stocks mentioned in the next 72 hours with the exception of a possible covered call. Image used does not constitute a purchase.