Editor’s Note: Please see our analysis of the latest earnings from three of Canada’s Big Six banks in the Portfolio Update section following the article below.

After two consecutive quarters of contraction, Canada’s economy finally picked up speed again. According to Statistics Canada, the country’s gross domestic product (GDP) grew 2.3% annualized during the third quarter—a faster pace than even the U.S. for that period.

Of course, in this challenging environment, good news is often accompanied by not-so-good news. The economy’s handoff to the fourth quarter was a fumble, with GDP declining by 0.5% during September.

Handoffs are important. A big factor in the third quarter’s strong showing was the economy’s reacceleration in June, which persisted through July.

In this environment, it should be no surprise that the continuing turmoil in the energy sector drove September’s decline. Oil and gas extraction fell 5.5% month over month, primarily due to production difficulties and maintenance shutdowns for non-conventional producers operating in Canada’s oil sands.

But even when excluding the drag from the resource space, GDP still declined by 0.1% during the final month of the third quarter.

Fortunately, the disruption in oil sands production has been resolved, and normal activity has resumed. So that should lead to stronger numbers in the months ahead.

Beyond that, a weak handoff isn’t cause to dismiss the overall third-quarter numbers. Indeed, given the first-half contraction, it’s worth celebrating the fact that third-quarter growth came in just below the minimum level at which Canada’s economy is estimated to operate at full capacity.

As economists with CIBC observed, “Exports were the major story for the third quarter, powering ahead at a 9.4% annualized pace after a lackluster first half.” Auto sales and energy exports were among the main drivers.

Which Themes Are Still Humming?

In addition to keeping tabs on the overall health of the economy, we also like to see which sectors are performing best to underscore existing investment themes or identify emerging ones.

In the goods-producing sector, agriculture is the one industry that’s grown over the past year, up 3.8%, to CAD25.2 billion.

The service sector is comprised of many more industries, and a number of them are showing meaningful year-over-year growth. The service industries with the biggest contribution to GDP, as well as the strongest growth, are real estate, up 3.1%, to CAD214.1 billion, and finance, up 3.1%, to CAD115.1 billion.

Despite the country’s economic woes, Canada is still in the midst of a housing boom, so the fate of these two industries is intertwined.

The big question is whether Canada’s policymakers will successfully engineer a soft landing for the housing market.

But that’s been the big question for a number of years now. Canada’s housing market has been so hot for so long, that I’ve been reading predictions of its imminent decline since 2009.

A country’s real estate market is really a patchwork of regional and local markets. And one real estate market worth watching is the one in Canada’s resource-rich province of Alberta, which has been rocked by the collapse in energy prices.

While it’s possible that the province’s real estate downturn could be contained, it also gives policymakers the first big opportunity in years to truly test their mettle.

Meanwhile, the financial industry continues to grind out growth.

During the third quarter, the major banks that constitute Canada’s Big Six, two of which we hold in our Dividend Champions Portfolio, delivered an average upside earnings surprise of 3.2%. That’s a big contrast to the average stock in the Canadian market, which fell short of estimates by 3.4%.

The banks’ actual numbers were even better. Revenue growth grew 4.1% year over year, powering earnings growth of 9.6%. And one of our favorites enjoyed double-digit earnings growth (see the Portfolio Update section below).

By comparison, their U.S. based counterparts saw sales decline by 3.0% and earnings drop by 4.7%.

Looking ahead, economists expect 2015 to be the trough for this cycle. Canada’s economy is projected to grow 2.0% next year and a further 2.2% the following year. That may not exactly be robust growth, but it shows that economists believe the country is making significant progress in working through the oil shock.

The Dividend Champions: Portfolio Update

By Deon Vernooy

The Canadian Banks are rolling out their quarterly results this week. First up were two banks on our watch list, Bank of Nova Scotia and Bank of Montreal, followed by Dividend Champions holding Royal Bank of Canada.

Bank of Nova Scotia (TSX: BNS, NYSE:BNS) reported a 10% increase in quarterly earnings per share and hiked the dividend by 6.1% compared to the same period last year.

The international division (30% of profits) experienced a strong quarter, with a 33% jump in profit, albeit from a low base. Increased loans, higher lending margins and lower provisions for credit losses combined to deliver the pleasing outcome.

The domestic Canadian banking operation increased profits by 10%, with loans and deposits both higher than last year.

The Global Banking and Markets division created a drag on the quarterly performance, with a 24% drop in profits mainly as a result of a sharp decline in investment banking income.

To my mind, the risk profile of BNS is higher than some of the other major Canadian banks, courtesy of its meaningful emerging market exposure. However, it also offers the opportunity to earn higher margins and profits.

We do not own BNS in the Dividend Champions portfolio. And despite an attractive 4.6% dividend yield, we’re happy to monitor the stock from the sidelines for now.

Bank of Montreal (TSX: BMO, NYSE: BMO) increased earnings per share by 17% in the fourth quarter, although this included some unusual gains that beefed up the results. The dividend was increased by 5% compared to a year ago and is probably a more reasonable reflection of the bank’s actual performance.

The U.S. Personal and Commercial banking business (around 18% of profits) fared particularly well, with a 22% jump in profits, partly as a result of the weaker Canadian dollar.

The Canadian Personal and Commercial business also did well, with a 6.5% increase in profits on the back of some loan growth and lower provisions for credit losses.

The bank recently announced the signing of an agreement to acquire the transportation finance business of General electric, with net earning assets of approximately USD8.9 billion. The acquisition has now closed and will contribute to profits in 2016.

BMO carries an inexpensive valuation, and it sports a dividend yield of 4.3%, with a payout ratio of 48%. We do not currently hold this company in the Dividend Champions Portfolio, but we’re certainly keeping a close eye on it.

Royal Bank of Canada (TSX: RBC, NYSE: RBC) reported an 11% increase in earnings per share compared to last year. The dividend was also increased by 5%.

It was an overall credible performance for the bank, with the important Capital Markets division raising profits by 38% compared to a depressed comparable quarter last year. Strong trading results and a positive foreign-exchange translation of U.S. profits contributed to the result.

The largest division, Personal and Commercial Banking, reported a 10% increase in profits compared to last year, with most of the growth coming from the Caribbean and U.S. Banking section operating from a low base. The Canadian division increased profits by 1%, despite solid loan and deposit growth and lower provisions for credit losses.

The smaller divisions, namely Wealth Management, Insurance and Investor and Treasury Services all reported lower profits.

RBC’s diversified business model once again supported the overall financial results and remains a key attraction for investors.

The dividend yield is now 4.1%. The stock is reasonably valued compared to its banking peers and remains a holding in our Dividend Champions portfolio, with a fair value of USD61/CAD81.