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Canadian Economy on a Roll: 4 Bank Stocks to Benefit

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The Canadian economy seems to be attracting investors’ attention of late because of the dazzling growth prospects it has to offer. The economy finally seems to have left behind the effects of the 2008-09 recession and the 2015 oil price collapse.

Better-than-expected growth in GDP indicates self-sustainability of the Canadian economy. Also, increase in consumer spending, expansion in the job market, rise in exports and trading volumes reflect growth of the economy.

Moreover, all the major banks delivered better-than-expected results in the last earnings season. We expect the Canadian banking sector as a whole to further benefit from the improved economic conditions.

The Bank of Canada’s overnight surprise — raising its lending rate to 1% — comes as a bonus. This rate hike is expected to boost the banks’ revenues. The rate move will gradually ease the pressure on net interest margin for the big Canadian banks.

This sudden rate hike follows the recent release of the economic data that marked the second-quarter annualized growth of 4.5% for Canada, which came above 3.3% expected by the central bank. By bringing rates back to the early 2015 level, before the central bank had announced two rate cuts to deal with the aftermath of the collapse in oil prices, the Canadian economy is running hot and offers a horde of growth prospects.

Also, with the elections approaching soon, further rate hikes may be underway in the near future, promising more support to the banking sector.

Zacks Industry Rank Indicates Solid Growth Potential  

The Canadian banks fall under the Zacks Foreign Banks Industry. This 70-company industry carries a Zacks Industry Rank of #22, which places it at the top 9% of 250 plus Zacks industries. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than two to one.

Our Screening Parameters

In order to save investors the time-taking process of identifying the Canadian banks that might benefit the most, we have created a three-faceted screen using the Zacks Stock Screener to shortlist such companies.

At first, we looked for Canadian banks that have projected annualized earnings per share growth (for the next three to five years) of more than 5%.

Next, we considered banks that have market capitalization of more than $40 billion, as they are safer to invest in.

Finally, we have picked stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Here are stocks that met all the criteria:

Royal Bank of Canada (RY - Free Report) : The stock has gained 20.6% over the past 12 months. The Zacks Consensus Estimate for the current year has been revised 9.4% upward over the last 60 days. Also, it sports a Zacks Rank of 2.

The Toronto-Dominion Bank (TD - Free Report) : Shares of this Zacks #1 Ranked stock have gained 22.9% in a year. The Zacks Consensus Estimate for the current year has been revised 13.2% upward, over the last 60 days.

Scotiabank (BNS - Free Report) : Over the past 12 months, shares of Scotiabank have gained 17.2%. It currently has a Zacks Rank of 1. The Zacks Consensus Estimate for the current year has been revised 8.3% upward, over the last 60 days.

Bank of Montreal (BMO - Free Report) : Shares of this bank have gained 11.8% in a year’s time. Further, its Zacks Consensus Estimate for the current-year earnings has been revised 8.3% upward over the last 60 days. As a result, it sports a Zacks Rank of 1.

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