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Tickers in this Article: BX, TD, RY, BNS, BMO
In a recent foray north of border, Blackstone Goup LP (NYSE:BX) co-founder and Chairman Stephen Schwarzman made a speech during which he practically gushed about the economic prospects for Canada. Referring to the country as an "oasis of stability" in an world now struggling with the the consequences of the global credit crunch, he also held out Canada's banking system as being worthy of congratulations for the way it had managed to navigate the turmoil of the global credit crisis relatively unscathed.

Canadian Banks Dodge the Subprime Bullet
Canadian financial institutions have been rated as being among the soundest banks in the world by the World Economic Forum. According to Bloomberg, Canadian banks collectively have only had to write off about $9 billion in bad investments related to U.S. subprime loans. That's an amount hardly worth mentioning relative to the $680 billion in writedowns so far reported in total by the world's banks. (Don't miss The Fuel That Fed The Subprime Meltdown.)

So, with all this positive buzz for Canada's banks, should U.S. investors now shift to the Great White North in search of a sound investment in the battered financial sector?

Loonie Rally Could Fuel a Rebound
Like many of their U.S. counterparts, the shares of four largest Canadian banks all have their shares listed on the New York Stock Exchange:

  • Royal Bank of Canada (NYSE:RY)
  • Toronto-Dominion Bank (NYSE:TD)
  • Bank of Nova Scotia (NYSE:BNS)
  • Bank of Montreal (NYSE:BMO)
Recently, share of these NYSE-listed Canadian banks, which are priced in U.S. dollars, experienced an additional downleg due to the dramatic nose-dive taken by the Canadian dollar over the last month. Falling commodity prices, especially oil, were responsible for the currency's selloff. After trading well over par to the U.S. dollar earlier this year, the Canadian loonie is now trading at a roughly 20% discount to the greenback. A rebound in the oil prices would quickly narrow this discount and move these bank shares higher, just due to currency effect alone.

Oil Still in Short Supply
Continuing concerns over falling production could force an oil price rebound. Citing a report just issued by the International Energy Agency (IEA), the U.K.'s Financial Times reported that the IEA now expects crude output from the world's biggest fields to decline at a faster rate than previously thought. The projected average annual rate of decline is now expected to reach 9.1% per year.

Unless massive investments are made at a rate of $360 billion per year between now and 2030 to find new sources of supply, production from existing sources will fall short of India and China's future projected needs. No doubt a significant portion of those investments will have to go into developing Canada's oil sands, with the Canadian banks in a good position to provide much of the required capital.

Canadian Banks on U.S. Shopping Spree
The Canadian banks themselves are also expected to ramp-up their own investment plans, snapping up struggling U.S. regional banks currently valued at bargain-basement prices.

Already, the "beaver banks" have made significant U.S. regional acquisitions. The Royal Bank has spent over $1.5 billion during the past two years snapping up Atlanta- based Flag Financial Corp. and Alabama National BanCorporation. Just last March, Toronto-Dominion paid $7.5 billion to purchase New Jersey- based Commerce Bancorp, which was subsequently merged into its existing TD Banknorth subsidiary, which operates in New England.

With their shares now trading at twice their book value, compared with the less-than-book valuations now assigned to many U.S. regionals, the Canadians could use their valuation advantage in deals involving share swaps as they expand their footprint in the U.S. market.

The Final Word
There's one other positive worth mentioning. While it's now fairly certain that Canada won't escape the impact of the U.S. recession, Canadian Finance Minister Jim Flaherty hinted that he was willing to allow the government to move into a deficit position. Stimulative spending programs and tax cuts now look to be in the cards, and that should allow the Canadian economy to glide to a softer landing than what's now in store across the border. For the banks, that should keep domestic loan growth from falling off a cliff.

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