royal bank

BANK OF NOVA SCOTIA, $52.25, Toronto symbol BNS, has agreed to buy ING Bank of Canada (which operates as ING Direct) from its Netherlands-based parent, ING Group. ING Direct offers a wide variety of no-fee banking services, mainly over the Internet. It has 1.8 million customers and $30 billion in deposits. Bank of Nova Scotia will keep ING Direct as a separate business and will not merge it with its regular banking operations. The bank will pay $3.1 billion for ING Direct when the deal closes in December 2012. However, ING Direct holds cash of $1.2 billion, so the real cost is around $1.9 billion. To fund this purchase, Bank of Nova Scotia plans to sell up to $1.7 billion of common shares for $52.00 each. That would increase the number of shares outstanding by 3%....

ROYAL BANK OF CANADA $53 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.4 billion; Market cap: $74.2 billion; Price-to-sales ratio: 2.7; Dividend yield: 4.3%; TSINetwork Rating: Above Average; www.rbc.com) is Canada’s largest bank, with $800.4 billion of assets.

The bank has come under fire recently over allegations that it colluded with other global banks to manipulate the benchmark London Interbank Offered Rate (LIBOR). Banks around the world base their own lending rates on LIBOR. Royal has denied these charges.

Royal also continues to cut its exposure to the PIIGS countries. As of April 30, 2012, it held $1.2 billion of loans and securities from these nations. That’s down from $1.4 billion on October 31, 2011.

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Canadian Western Bank, $26.60, symbol CWB on Toronto (Shares outstanding: 78.2 million; Market cap: $2.1 billion; www.cwbank.com), offers business and personal banking services across the four western provinces. It’s the biggest Canadian bank headquartered in western Canada and the country’s eighth-largest. The bank’s wholly owned subsidiaries include National Leasing Group Inc., Canadian Western Trust Company, Valiant Trust Company, Canadian Direct Insurance Inc., Adroit Investment Management Ltd. and Canadian Western Financial Ltd. In the three months ended April 30, 2012, Canadian Western Bank’s earnings rose 7.4%, to $39.7 million from $36.9 million a year earlier. Earnings per share were unchanged at $0.52, on more shares outstanding. Net interest income rose 8.6%, to $105.1 million from $96.8 million. Other income fell 1.7%, to $20.3 million from $20.6 million....

The sovereign debt problems in Europe, particularly among the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain), have held back the shares of Canada’s big five banks in the past few months. However, their exposure to these troubled countries remains small in relation to their earnings and market caps. Every investor should aim to hold at least two of Canada’s big banks. For new buying, Bank of Nova Scotia (see next page) remains our favourite. ROYAL BANK OF CANADA $53 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.4 billion; Market cap: $74.2 billion; Price-to-sales ratio: 2.7; Dividend yield: 4.3%; TSINetwork Rating: Above Average; www.rbc.com) is Canada’s largest bank, with $800.4 billion of assets....

ISHARES DOW JONES CANADA SELECT DIVIDEND INDEX FUND $20.08 (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) holds 30 of the highest-yielding Canadian stocks. Its selections are based on dividend growth, yield and payout ratio. The weight of any one stock is limited to 10% of its assets. The fund’s MER is 0.50%. It yields 4.5%.

The fund’s top holdings are CIBC, 6.9%; National Bank, 6.0%; TD Bank, 5.6%; Bank of Montreal, 5.2%; Bonterra Energy, 5.2%; AG Growth International, 4.8%; Royal Bank of Canada, 4.3%; Bank of Nova Scotia, 4.3%; and BCE Inc., 4.0%.

The fund holds 54.1% of its assets in financial stocks. Utilities are next, at 21.4%. The top Canadian finance stocks have sound prospects. However, if you invest in this ETF, be sure to adjust the rest of your portfolio so it won’t be overly concentrated in the financial sector.

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ISHARES S&P/TSX 60 INDEX FUND $16.65 (Toronto symbol XIU; buy or sell through brokers; ca.ishares.com) is a good, low-fee way to buy the top stocks on the TSX. The units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Expenses are just 0.17% of assets.

The index mostly consists of high-quality companies. However, as the fund must ensure that all sectors are represented, it holds a few stocks we wouldn’t include.

The index’s top holdings are Royal Bank, 7.2%; TD Bank, 7.0%; Bank of Nova Scotia, 5.9%; Barrick Gold, 4.4%; Suncor Energy, 4.3%; CN Railway, 3.7%; Bank of Montreal, 3.5%; Potash Corp., 3.4%; Goldcorp, 3.3%; BCE Inc., 3.2%; Canadian Natural Resources, 3.2%; Enbridge, 3.1%; TransCanada Corp., 3.0%; CIBC, 2.8%; Cenovus Energy, 2.3%; and Telus Corp., 1.9%.

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Most stock markets are down lately due to investor worries about a potential eurozone breakup, sluggish U.S. growth and a slowdown in China. Still, the long-term outlook is positive. One way to profit from a rebound is to add exchange traded funds (ETFs) that track major stock market indexes to your portfolio. ETFs trade on stock exchanges, just like stocks. Prices are quoted in newspaper stock tables and online. You must pay brokerage commissions to buy and sell ETFs, but their low management fees still give them a cost advantage over most mutual funds....

CGI GROUP INC., $23.37, Toronto symbol GIB.A, jumped 13% this week after it agreed to buy Logica plc, a U.K.-based firm that provides computer outsourcing services in 36 countries. Logica gets 60% of its sales from the U.K. government. CGI will pay roughly $2.8 billion for Logica. That’s equal to 52% of CGI’s $5.4-billion market cap, so it’s a major acquisition for the company. But Logica is a good fit with CGI, which is Canada’s largest provider of computer outsourcing services. Both companies’ services automate certain routine functions, like accounting and buying supplies. That makes their clients more efficient and lets them focus on their main businesses....

ROYAL BANK OF CANADA $56 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.4 billion; Market cap: $78.4 billion; Price-to-sales ratio: 2.2; Dividend yield: 4.1%; TSINetwork Rating: Above Average; www.rbc.com) is Canada’s largest bank, with $815.0 billion of assets.

The U.S. Commodity Futures Trading Commission (CFTC) recently accused Royal of using a complex series of trades to cut its tax bill in Canada. Specifically, the CFTC says that divisions of the bank bought Canadian and U.S. dividend-paying stocks (plus futures contracts on these stocks) and quickly sold them to other divisions. These transactions would let Royal earn tax credits on the dividends it received from these holdings.

The CFTC claims that this process was a wash trade, in which the bank artificially set prices for these transactions, instead of letting the market determine the prices. Royal has denied these allegations, and we agree with Royal. As well, any potential fine would likely be small next to Royal’s earnings.

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ROYAL BANK OF CANADA (Toronto symbol RY; www.rbc.com) is Canada’s largest bank, with $815.0 billion of assets. The U.S. Commodity Futures Trading Commission (CFTC) recently accused Royal of using a complex series of trades to cut its tax bill in Canada....