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Will a Slowing Economy Continue to Drag Down the Top 2 Canadian Bank Stocks?

In early March, Royal Bank of Canada (TSX:RY)(NYSE:RY) overtook Toronto-Dominion Bank (TSX:TD)(NYSE:TD) as the biggest bank in Canada, boasting $1.28 trillion in assets. Royal Bank stock has dropped 4.4% in 2018 as of close on April 10, and shares of TD Bank have declined 3.8% so far. Broad stock market weakness in Canada and the United States has dragged down both in spite of relatively strong first-quarter results.

Royal Bank posted net income of $3 billion in the first quarter, which was down year over year due to the gain on a sale in Q1 2017 of the U.S. operations of Moneris. Adjusted for this item, net income was up 7% from the prior year. Adjusted net income in Personal and Commercial Banking was up $141 million from the prior year. Wealth Management and Capital Markets segments net income increased 39% and 13% year over year, respectively. Royal Bank also hiked its quarterly dividend by 3% to $0.94 per share, representing a 3.6% dividend yield.

TD Bank released its first-quarter results on March 1. It absorbed a $405 million one-time tax charge due to the U.S. Tax Cuts and Jobs Act. Numbers were positive in the first quarter, as adjusted net income rose to $2.94 billion compared to $2.55 billion in the prior year. TD’s Canadian and U.S. Retail segments both reported double-digit growth in the first quarter. The bank also offers a dividend of $0.67 per share, representing a 3.5% dividend yield.

Leadership from both Royal Bank and TD Bank have been vocal about the path of the Canadian and U.S. economies in 2018.

Royal Bank CEO Dave McKay recently warned that Canada was seeing a troubling trend of capital outflow in light of U.S. tax reform. Investment in the Canadian oil and gas sector has plummeted since the oil crash of 2014. Canadian real estate has also suffered mightily since mid-2017 and the near collapse of Home Capital Group Inc.

TD Bank CEO Bharat Masrani warned in early April that trade tensions “could trigger a slowdown and perhaps even recessions in certain countries.” The bank has benefited from its growing U.S. footprint, and leadership is confident that tax reform will be a boon going forward. Fortunately for TD Bank and the Canadian economy at large, it appears that a NAFTA deal is likely to be reached in the spring, barring a breakdown in negotiations.

Canadian GDP unexpectedly shrank 0.1% in January. This decline was driven by the declines in oil extraction and real estate activity. Analysts expected a retreat from the surge seen in 2017, but the slide in January will likely irk investors after a brutal first quarter for the Toronto Stock Exchange.

In spite of the early slowdown and general anxieties, Canadian companies are still optimistic. This is according to a Bank of Canada survey of business sentiment conducted from early February to March. Both banks could also benefit from a NAFTA deal that could be reached in principle within the month. Investors that are willing to bet on a bounce back for Canada in the spring and summer should consider adding Royal Bank and TD Bank, as both stocks have hit lows not reached since the fall of 2017.

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

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