Are Canadian Bank Stocks a Buy?

Canadian bank stocks have participated in the rally, but pundits have mixed feelings about whether investors are too optimistic. Are bank stocks a buy today?

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.

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.

More on Bank Stocks

A worker uses a double monitor computer screen in an office.
Bank Stocks

Where Will iA Financial Be in 10 Years?

With strong earnings growth and a rising market presence, iA Financial stock may just be getting started.

Read more »

protect, safe, trust
Bank Stocks

Is Toronto-Dominion Bank Stock a Buy Now?

TD stock is up more than 25% in 2025. Are additional gains on the way?

Read more »

investor looks at volatility chart
Bank Stocks

The $35,000 Long-Term Strategy for Market Volatility

Both time in the market and timing the market helps in building long-term wealth. So, investors should hold some cash…

Read more »

open vault at bank
Bank Stocks

1 Bank Stock Up 15% to Consider Right Now

Bank of Nova Scotia is up 15% in the past two months. Are more gains on the way?

Read more »

top TSX stocks to buy
Bank Stocks

1 Multibagger Financial Stock Down 6% Paying an Iron-Clad Dividend

This dividend stock has paid a dividend since 1833! And doesn't look to be slowing down any time soon.

Read more »

path road success business
Bank Stocks

TD Bank: Buy, Sell, or Hold?

TD is up 25% in 2025. Are more gains on the way?

Read more »

Paper Canadian currency of various denominations
Bank Stocks

Should You Buy Royal Bank of Canada While it’s Below $180?

Royal Bank may be underperforming the broader market in 2025, but its solid foundation could make this dip a smart…

Read more »

coins jump into piggy bank
Stocks for Beginners

TD Bank vs. Royal Bank: How to Allocate $10,000 to Bank Stocks

These two bank stocks are the biggest of them all, but which is the best way to invest?

Read more »