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U.S. market looms large for Canada's banks Add to ...

Canadian banks - and investors - have traditionally been cautious when it comes to looking abroad. But higher valuations will increasingly depend on the banks' international growth strategies, where the U.S. personal and commercial banking segment will play a crucial role, analysts say.

What we're looking for

Canadian banks that will benefit from the changing U.S. financial landscape and international expansion.

What we found

After decades of struggling against U.S. rivals, Canadian banks now find themselves in a position of strength after the financial crisis, Desjardins Securities analyst Michael Goldberg said. They have thrived and grown, while the U.S. banking sector has undergone a process of consolidation that is likely to continue for the next few years.

"We believe the tables have turned for Canadian banks and their U.S. franchises will successfully add value over time," Mr. Goldberg wrote in a research report. "Canadian banks have emerged from the financial crisis as bigger players in the overall U.S. banking sector and enjoy business conditions conducive to increasing their market share."

Bank of Montreal is the stock with the greatest upside potential, Mr. Goldberg said, citing a price target of $70, or an 11-per-cent return.

Investors have been unduly wary of its acquisition of Milwaukee-based Marshall & Isley Corp., he said. "We believe that sentiment will be mixed for a long time regarding the acquisition of M&I by BMO, although we believe BMO will be able to make the acquisition accretive within the year."

Bank of Nova Scotia and Toronto-Dominion Bank are Mr. Goldberg's top picks because they are "the fundamentally strongest banks."

"TD has been the most successful at gaining investor confidence in the success of its U.S. operations, whereas Royal has been the least successful," Mr. Goldberg said. Royal Bank of Canada is even considering selling its embattled U.S. consumer and business banking operations, sources told The Globe and Mail on Thursday.

TD and Scotiabank are also TD Newcrest analyst Jason Bilodeau's top picks. "As the domestic market continues to soften, we favour names with differentiated and defined growth strategies outside of the domestic market," he wrote in a report. "We also like the near-term prospects for the improving earnings power at Royal and CIBC."

Both Scotiabank and TD exceeded investors' expectations with their first-quarter dividend increases, and National Bank of Canada is likely to be next in line, Mr. Goldberg said.

"We also expect each of the banks to announce a dividend increase in the fourth-quarter of fiscal 2011," Mr. Goldberg wrote.

"In fiscal 2012, we expect dividend growth again to be greatest at National Bank (11-per-cent annual growth), followed by TD and Royal Bank (8-per-cent annual growth), then Bank of Nova Scotia (7-per-cent annual growth)."

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