Canadian bank stocks have pulled back from their 2018 highs, which has investors wondering which names might be interesting picks for a self-directed RRSP.
CIBC has a track record of making big blunders. The most notable was the billions of dollars in writedowns the company took during the Great Recession as a result of bad bets on subprime loans in the United States.
The company shifted its focus to Canada after the crash, which proved to be a profitable move amid the rally in house prices. However, investors are now concerned the company might be too reliant on Canada for its earnings, and rising interest rates have stoked fears of a housing crash.
CIBC is certainly more exposed to a Canadian housing downturn on a relative basis, compared to its larger peers, but things would have to get pretty bad before the bank takes a material hit. To date, the market has held up well amid rising interest rates, and recent indications from the Bank of Canada suggest the pace of rate increases might slow down in 2019.
Management has also taken important steps to diversify the revenue stream. CIBC spent US$5 billion last year to acquire Chicago-based PrivateBancorp. The deal gave CIBC a strong U.S. platform to expand its presence in the market, and the CEO has indicated additional deals could be on the way.
CIBC’s dividend should be very safe and currently provides a yield of 5%.
The stock is down to $108 from a high near $125 per share in September. At this price the company trades at just 9.3 times trailing earnings.
Royal Bank is a giant in the Canadian and global banking industries. Even after the pullback from $108 per share to the current price of $95, the company still has a market capitalization of $138 billion.
Royal Bank reported strong fiscal Q4 and full-year 2018 earnings of $12.4 billion. That’s an impressive sum and the good times appear set to continue.
Royal Bank has also expanded its presence in the United States in recent years. The company paid US$5 billion at the end of 2015 to buy private and commercial bank City National. The U.S. operations accounted for 17% of total earnings in the past 12 months.
The drop in the share price puts the stock at 11.4 times trailing earnings.
Royal Bank is targeting medium term earnings growth of 7-10% per year. The dividend provides a yield of 4%.
Is one more attractive?
CIBC and Royal Bank should both be solid buy-and-hold picks for a self-directed RRSP portfolio.
If you are a contrarian investor, CIBC might be the way to go as it provides a better yield and appears oversold, although the stock does carry more risk in the event the Canadian housing market gets ugly.
If you want to take a safer approach, stick with the industry leader, Royal Bank. You still get a solid 4% yield and the current multiple should be reasonable given the earnings outlook.
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Fool contributor Andrew Walker has no position in any stock mentioned.