Canadian Banks Are Bouncing Back: Time to Buy?

A long overdue rally in Canadian banking stocks seems to be building. Should you take a position in stocks such as Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM)?

| More on:

Investors stayed clear of Canadian banking stocks this year, despite a superior performance by the economy that surprised many analysts.

Most of this year, banking stocks remained weak on concerns that overheated housing markets in the nation’s largest cities will erode profitability, and in the possible scenario of a sharp decline in home prices, they’ll suffer even more.

But it seems that this doomsday scenario has run its course, and we’ve seen a rebound in banking stocks for the past month.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stock has taken the lead, rising over 7%, while the hardest-hit Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) has reversed the declining trend and now is up by ~2% at the time of writing.

Should we expect a strong rally in Canadian banking stocks going forward?

Barring any geopolitical setbacks, such as a nasty turn in U.S.-North Korean relations, Canadian banks are in a good position to stage a strong comeback in the next couple of months.

Investors have so far ignored all of the good news that was associated with the strengthening Canadian economy.

Technically speaking, banks should have rallied when the Bank of Canada raised interest rates twice in the past two months, as the economy has been firing on all cylinders. Higher interest rates mean more interest-based income for lenders and more lending opportunities to businesses.

But what kept investors on the sidelines during this period was the fear of a housing market collapse after the prices started to soften up in Toronto this spring. A crash of housing market, which short-sellers were counting on after the near collapse of Home Capital Group Inc. this spring, didn’t play out.

Now that all these worries are out of the way, Canadian financial stocks should outperform strongly rest of the year.

Investor takeaway

I think the timing is good to pick some nice yields in the financial space for income investors. CIBC stock, after falling about ~7% this year, offers a dividend yield of 4.8%. The bank has been hit the hardest during this weakness because it has the most exposure to the Canadian housing market. But its balance sheet and future growth prospects are all intact, especially when we’re in for a strong growth cycle.

Similarly, Bank of Montreal (TSX:BMO)(NYSE:BMO), Canada’s fourth-largest bank, has slid ~6% in the past six months with the dividend yield of 3.9%. The bank has a great dividend track record, and investors should expect regular payout hikes from this lender.

Investors can benefit from these opportunities to earn stable dividend income by buying some undervalued dividend stocks. I see only a way up from these levels.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Haris Anwar has no position in any stocks mentioned.

More on Dividend Stocks

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »