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Canadian Bank Stocks: Time to Take Profits?

On October 31, Statistics Canada revealed that GDP fell by 0.1% in August. This marks two months of flat or negative GDP after eight consecutive months of growth before July. Experts and analysts had originally expected marginal growth of about 0.1% for the quarter. After an incredible second quarter in which the Canadian economy grew by 4.5%, it has seemingly cooled off to temper expectations.

The S&P/TSX Index has gained over 6% since dropping below 15,000 points in early September. The index now sits above 16,000 points for the first time in its history. Cannabis stocks have been surging, but it was the impressive third-quarter results of Canadian banks in late August and the subsequent gains that powered this rally.

I recently covered the Bank of Canada’s decision to hold on interest rates and how that could impact Canadian bank stocks. With the Canadian economy beginning to lag in the latter half of 2017, does it make sense for investors to take profits as bank stocks reach record highs?

The heavy hitters

Shares of Toronto-Dominion Bank (TSX:TD)(NYSE:TD) have surged 10% since the September 6th rate hike and have continued to climb after the recent decision to keep the benchmark rate at 1%. More than anything, TD Bank has climbed on its impressive third-quarter results in which its profit jumped 17% to $2.77 billion. Both its Canadian and U.S. retail sectors saw a 14% increase in its net income.

TD Bank is unique among Canadian banks because of its significant U.S. exposure, which I detailed here. With the possibility of a huge windfall from U.S. tax reform, and TD working to establish itself as a top 10 U.S. bank, I do not think investors should be reducing their exposure just yet.

Royal Bank of Canada (TSX:RY)(NYSE:RY) stock also hit an all-time high of $102.15 in late October. The stock has climbed 11% since threatening to drop below the $90 mark in early September. Royal Bank released very positive third-quarter results on August 23 that saw net income jump 5% to $2.79 billion after adjusting for the sale of its home and auto insurance manufacturing business last year.

Royal Bank hiked its dividend by 5% to $0.91 per share, representing a 3.6% dividend yield. The bank has been very forward-thinking when it comes to its advances in technology. It is also experimenting with blockchain, the decentralized network technology that serves as a key component for cryptocurrencies like Bitcoin to move payments between its U.S. and Canadian banks. The stock has actually tapered off somewhat from its October highs, so those electing to sell may want to look back again if it falls back below $100.

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) reached an all-time high of $83.85 on October 31. The stock has increased 11.1% in 2017 as of close on November 1 and 15% year over year. Its net income climbed to $2.1 billion from $1.9 billion in the third quarter, and it also hiked its dividend by 7%. Even at record highs, I still like Bank of Nova Scotia as a long-term add right now, in particular for its emerging markets exposure.

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Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned.

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