Whether Statistics Canada, the National Bureau of Economic Research or headline writers ever declare “recession”–and however thorough their examination–the evidence has been clear for some time that the global economy has entered a difficult period of stagnating growth.

The burst of the subprime-pumped US real estate bubble has left banks all over the world wet and dazed. US banks reported an aggregate 86.5 percent year-over-year drop in second quarter profits. Total writedowns for the group since last summer has now rung up to USD275 billion.

Results for the biggest global financials are no less gruesome: UBS announced GBP5.1 billion in new writedowns and its fourth quarterly loss in a row, blaming exposure to the US housing market and a huge outflow of wealthy-investor funds. UBS is now in for USD42 billion to the crunch, down there with Citigroup (USD47 billion) and Merrill Lynch (USD46 billion). The global bill is in the neighborhood of USD500 billion.

Investors have tossed all financials, good and poor performers, to the same heap, but each is different and should be evaluated on its own merits. And, though it’s still too early to declare winners, it’s easy to identify leaders right now.

Canada’s Big Six banks collectively reported a 21.2 percent second quarter profit decline, and new writedowns brought the total to CAD11 billion since the credit crisis got going. That’s about what Deutsche Bank, thought by many to be among the frontrunners, has written off.

The now year-old credit crunch has certainly stress tested the Canadian banks, and you, too, for that matter. The lingering questions are to what extent the US and global economic slowdown will hurt Canada and how that impacts domestic growth rates; deposits and (sound) loans are the backbone of any solid bank. The answer, quite simply, depends on the condition of the US housing market.

But history (and the present; see the Korea Development Bank–Lehman Brothers ticket) shows that solid financials often emerge stronger after periods of difficulty. Well-run, lower-risk operations are able to use healthy balance sheets and highly-valued stock to boost market share at the expense of also-rans.

Canada’s banks now boast some of the highest valuations among Western financial services stocks, meaning they have solid currency–their stock–to use for acquisitions. As a group, the Big Six Canadian banks have a chance to emerge from the credit crunch as bigger, more global players. Let’s not, however, make the same mistake those who’ve tossed all financials to the dustbin have made. There are good stories here, and there are bad.

Bank of Nova Scotia (TSX: BNS, NYSE: BNS) has weathered the storm better than most simply because its subprime exposure was minimal relative to its Canadian and global peers’ and it decided long ago to build its business in emerging markets.

Scotia decided to build its business in emerging markets. It now has a strong position in many countries in Latin and South America and has made a strong entrance into Asia. Emerging middle class consumers in these regions are looking for financial services similar to those offered in North America and other developed regions.

That it didn’t announce a dividend hike along with its second quarter numbers disappointed a few analysts accustomed to a constantly rising stream. That it has increased its quarterly payout 9 percent to CAD0.49 per share during the last 12 months while continuing to execute a well-designed long-term growth strategy makes it a compelling investment story.

The Chinese asset management market grew at a compounded annual rate of more 230 percent during the three years ended Dec. 31, 2007.

Bank of Nova Scotia, which now operates in 11 countries in Asia-Pacific and has been in China since 1982, is putting up a one-third stake in a USD44 million mutual fund joint venture (JV) with Bank of Beijing and another, unnamed party. Bank of Beijing has more than 138 million investor accounts and USD380 billion in assets under management. The JV, Bank of Beijing Scotiabank Asset Management, will market mutual funds to Bank of Beijing’s 8.2 million retail and institutional customers.

Scotiabank also owns 24.9 percent of Thanachart Bank, a major automobile financier and retail bank in Thailand.

Scotiabank’s domestic unit posted a 16 percent increase, to CAD455 million, in net income available to common shareholders on a 9 percent revenue increase. Canadian mortgages, personal and business lending volumes grew. Its international unit posted net income of CAD321 million, up 19 percent. Provisions for credit losses rose to CAD159 million, from CAD92 million. Return on equity was 21 percent, down from 21.7 percent.

Scotiabank’s legitimately global retail banking platform and limited exposure to US credit put it in position to produce earnings and dividend growth outperformance for the foreseeable future. With its dominant franchise in Canada, its emerging markets and its increasing wealth management business, bolstered by its recent acquisition of E*Trade Canada, Canada’s No. 3 bank has good long-term growth prospects. Bank of Nova Scotia is a buy up to USD58.

Toronto-Dominion Bank (TSX: TD, NYSE: TD) is the sole member of the Big Six to announce a dividend increase along with second quarter numbers. Toronto-Dominion raised its quarterly dividend 3 percent to CAD0.61 per share from CAD0.59.

Toronto-Dominion hasn’t entirely avoided the writedown syndrome–a CAD96 million trading loss certainly raises risk management issues. But its focus on retail bank operations and US exposure in the Northeast, a relatively safe region in an otherwise troubled national market, balances those concerns. TD Canada Trust, the domestic retail business, posted an 8 percent rise in profit to CAD644 million. Earnings from its US personal and commercial banking unit, which includes New Jersey-based Commerce Bancorp after a USD8.5 billion acquisition, more than doubled to CAD244 million. Toronto-Dominion reported strong volume growth in deposits, real estate secured lending and credit cards.

Toronto-Dominion raised its provisions for credit losses by 68 percent to CAD288 million. Return on equity was 13.4 percent in the quarter, down from 21 percent a year earlier. Toronto-Dominion Bank, now yielding 4 percent, is a buy up to USD62. 

Source: Bloomberg

Royal Bank of Canada (TSX: RY, NYSE: RY, RBC) logged pre-tax writedowns of CAD342 million in its capital markets segment and CAD53 million on its US banking investment portfolio. Provisions for credit losses rose 88 percent to CAD334 million from CAD178 million a year earlier.

In its core Canadian banking business, net income surged 19 percent to CAD709 million on volume growth across all business lines and cost cutting. Return on equity was 19.4 percent in the quarter, down from 24.4 percent a year earlier.

RBC operates in the US Southeast, a particularly troubled spot on the map. And its role in the American auction rate securities market is a problem: Canada’s largest bank has been subpoenaed by New York Attorney General Andrew Cuomo over its participation in the market. Citigroup, UBS and Wachovia have coughed up billions to settle similar matters.

Royal Bank of Canada, which may be a player in the game to scoop up US mid-cap regionals or even Wachovia, is a hold.

Bank of Montreal (TSX: BMO, NYSE: BMO, BMO) and Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM, CIBC) took on too much risk and are paying the price.

BMO’s net profit fell 21 percent, as provisions for credit losses surged and it took charges for the declining value of credit-related securities. The bank took charges of CAD134 million for derivative contract values and impairments on preferred shares and asset-backed commercial paper. Provisions for credit losses totaled CAD484 million, with “unusually elevated” specific provisions of CAD434 million because of two corporate accounts related to the US housing market.

BMO has US exposure in the Midwest, which leaves it exposed to further credit deterioration. In its domestic personal and commercial banking operations, net income fell 3 percent to CAD343 million. Return on equity fell to 13.5 percent in the quarter from 18 percent a year earlier. Sell Bank of Montreal.

CIBC, the weakest of Canada’s Big Six, has been watching the writedowns pile up. Second quarter writedowns totaled CAD885 million, bringing the nine-month figure to CAD7 billion. Analysts forecast the bank is staring down another CAD1.5 billion to CAD1.9 billion in the third quarter. CIBC’s retail segment posted a 4 percent profit decline to CAD572 million.

CIBC, by far the worst afflicted by the collapse of the US subprime housing market, still has a distance to go before it resolves its problems. Sell Canadian Imperial Bank of Commerce.

National Bank of Canada (TSX: NA, OTC: ), the last-to-join, often overlooked member of the Big Six, holds a pile of asset-backed commercial paper and is heavily exposed to Quebec, a region stuck by the downturn in Canadian manufacturing.

Net income in its personal and commercial banking business rose 2 percent to CAD127 million, and financial markets profit jumped 75 percent to CAD163 million. But the smallest of the big banks booked another CAD37 million in losses related to asset-backed commercial paper. National Bank of Canada is a hold.