The Motley Fool

Are Canadian Bank Stocks a Buy?

Image source: Getty Images

The TSX Index is up 30% from the March 23 low. Canadian bank stocks have participated in the rally, but pundits have mixed feelings about whether investors are too optimistic.

Recession — or depression?

Seven million Canadians applied for the Canada Emergency Response Benefit (CERB) in recent weeks. According to the OECD report for February 2020, there are roughly 24.5 million Canadians aged 15-64, which is the group considered to be in the working-age range.

Based on the CERB claims number, nearly 30% of Canadians who can work say they are now earning less than $1,000 per month.

Thousands of businesses closed due to lockdowns. As the provinces put plans in place to begin reopening the economy, the government hopes aid measures will result in a quick rebound in rehiring. Wage subsidies, emergency loans, and rent relief are all in the works.

Part of the challenge involves getting businesses back on their feet in a timely manner. Consumers, however, must feel comfortable and actually have cash to spend.

Will we see a “V” recovery or a “U” recovery? This is the major question. Top business leaders and economists have a wide range of opinions. An investor’s belief regarding the eventual speed of the recovery has a large impact on whether or not bank stocks should be on the buy list.

Are Canadian bank stocks attractive today?

Optimistic projections suggest a strong economic rebound could begin by the end of 2020. The International Monetary Fund (IMF) expects global growth to rebound significantly in 2021.

The Canadian banks entered the crisis in solid shape. The Big Five all have strong capital positions and should benefit from government programs designed to mitigate the economic damage. CMHC is buying up to $150 billion in mortgage, giving the banks added capital to continue lending.

The banks maintained their distributions during the Great Recession. In the event we see a strong economic recovery in 2021, the dividend payouts should be safe. At the time of writing, dividend yields from the largest Canadian banks range from 5% at Royal Bank of Canada to 7% at CIBC.

Risks

The magnitude of the economic crisis is as yet unknown. One economist, David Rosenberg, recently told BNN that he sees the impact being 10 times that of 2008-2009. If high unemployment continues for the next few years, the banks are going to feel some pain.

Short-term deferrals on loan and mortgage payments simply buy time. People need to return to work and businesses must survive to avoid an extended downturn. The banks have the means to ride out the storm, but they could face larger defaults than currently expected if the crisis drags into the second half of next year.

The bottom line

I wouldn’t back up the truck today given the near-term uncertainty, as we could still retest the March low. However, investors with a buy-and-hold strategy might want to start nibbling on their favourite Canadian bank stocks at these levels.

The Canadian banks should prove to be long-term winning bets. In the meantime, you get paid well to ride out the turbulence while waiting for the government stimulus measures to drive new economic expansion.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 Andrew Walker has no position in any stock mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.