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The failure of Silicon Valley Bank (SVB) and the hasty sale of Credit Suisse to rival UBS caused the shares of financial institutions around the world to fall. Is It a Good Time to Buy Bank Stocks?
In the past month, Canada’s six largest banks have lost more than $60 billion in market value. National Bank shares fell 5% and Royal Bank shares fell 7%.
TD gets roughed up
However, shareholders of the two most prominent institutions in the United States suffered the most: TD Bank lost 15% and Bank of Montreal nearly 12%. Approximately 40% of the TD and BMO deposits are south of the boundary.
According to a recent report by CIBC Capital Markets, Canadian bank stocks are currently trading at a 17% discount to their 10-year median valuation.
The more cautious banks
Why this ? While there have not been massive withdrawals from Canadian banks like in the US, the crisis that began with the collapse of the SVB is far from having its last word.
The most immediate effect is that banks become more cautious. They lend less readily, which is detrimental to the growth of their income and profits.
The danger of a recession
Added to this are the further increases in interest rates and the associated increased probability that we will fall into a recession. Which deters many investors.
Canada’s major banks have always been popular with savers. This is understandable: since they form an oligopoly and are very well capitalized, there is practically no risk of bankruptcy. They also pay generous dividends — the average currently stands at 5%.
However, banks are anything but immune to recessions. When the economy shrinks, loan losses rise, credit card spending falls, and brokerage earnings fall. It’s not uncommon for bank stocks to fall more sharply than stock indices, as we saw during the 2008 (and last year) crisis.
That’s why Vancouver-based Canaccord Genuity analyst Scott Chan just cut the price targets of Canada’s big six banks — by a percentage of 3% to 17%.
His colleague Paul Holden from CIBC is also cautious towards the banks.
“Bank valuations are relatively low, but we think it’s early days to start bargain hunting,” he warns.
If you still want to dive, National Bank and Scotiabank, which have virtually no presence in the United States, “are probably better positioned in the short term given the ongoing uncertainty,” says Chan.
They rarely disappoint…
We must not forget that Canadian banks have rarely disappointed over the long term.
Over 10 years, BMO’s ZEB exchange-traded fund, which consists of shares in Canada’s six major banks (each with equal weighting), has posted a total return (capital appreciation and dividends) of 10.5% per year. That’s better than the 8.3% of the iShares XIU ETF, which tracks the S&P/TSX 60 index. However, over five years, the latter (9.2% per year) has the upper hand over the ZEB (8.5%).
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