The U.S. banking sector was rocked by a string of bank failures in 2023, shaking the confidence of investors and bank customers alike. If you are looking for investment opportunities in the fallout, consider looking north to Canada.
It's there that dividend investors will find Toronto-Dominion Bank(NYSE: TD), Bank of Montreal(NYSE: BMO), and Bank of Nova Scotia(NYSE: BNS). All three are attractive alternatives to U.S. banks and potential investments for those seeking banking sector stocks. Here's why.
Boring by nature
The Canadian government has a very different approach to regulating its banking sector. Basically, it focuses on ensuring stability and low risk by protecting the market share of a small number of large banks. TD, BMO, and Scotiabank (as the three banks being discussed here are commonly referred to) are in this group of entrenched industry giants. Along with this, however, comes a high level of regulation that instills a safety-first ethos in all of these companies. The U.S. banking system is far more competitive, and risk-taking (as recent bank implosions have shown) is more common.
One done, one to go (maybe)
All this stability and regulation isn't to suggest that TD, BMO, or Scotiabank are sitting around milking their Canadian businesses for cash. All three invest in the future in their own way. For example, TD has for years expanded its exposure to East Coast markets in the United States as well as increased the breadth of products it offers. The most recent deal was the purchase of investment bank Cowen, which augmented its capital markets business.
TD is also working on the purchase of First Horizon(NYSE: FHN), which will increase its East Coast presence. This deal, however, is in a state of flux thanks to the bank failures, and TD Bank is likely pushing for a better price. Even if the deal falls apart, however, TD still has ample room and ability to organically expand in the U.S.
A done deal
Bank of Montreal, meanwhile, has just recently completed the acquisition of Bank of the West. This business roughly doubled BMO's U.S. presence, with the most notable geographic boost coming in West Coast markets. Regulatory issues delayed the closing of the deal (and were completely unrelated to the bank failures of 2023), so the financial benefits BMO expected will be pushed out. A rising interest rate environment is another headwind putting pressure on the deal.
While it may fall a little short of early return projections, the long-term benefit is really the bank's increased scale in the U.S. market, where competition isn't stifled by heavy regulation. In other words, once digested, BMO can use this as a platform to further expand its U.S. reach and build on the foundation provided by its strong Canadian bank business.
Avoiding the mess
Scotiabank is a very different situation. It has a large Canadian operation (42% of earnings) and big businesses in Mexico (14%), Chile (11%), Peru (8%), and other Central American and Caribbean markets (9%). U.S. operations (12%) and "other" businesses round the total out to 100%. Basically, even as the U.S. banking sector reeled, Scotiabank sailed right along because its U.S. exposure was very limited.
That shouldn't be taken to suggest that Central and South America are risk-free banking markets, which is definitely not true. But this is not a new focus for Scotiabank. It has operated in the region for a very long time and knows its markets well. The big attraction for the bank, and investors, is that these markets expect to offer higher growth rates over time because they are still largely emerging economies, not fully developed ones like the U.S. and Canada.
One other thing that brings TD, BMO, and Scotiabank together is relatively high dividend yields (4.6%, 4.7%, and 6%, respectively) compared to U.S. peers. Moreover, all of these Canadian banks have long histories of paying stable or growing dividends, noting that even U.S. giants like Bank of America and Citi cut their dividends during the Great Recession.
If you are looking at the U.S. banking mess and thinking it's time to buy a bank, it might just be time to buy a Canadian bank.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has positions in Bank Of Nova Scotia and Toronto-Dominion Bank. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.