It’s been a mixed couple of weeks for the Big Five — and that’s putting it lightly. What’s remarkable, though, is that investors hardly batted an eyelid. In what other year could a bank post an enormous Q2 profit loss and experience 10% five-day gains?
These kinds of Looking Glass markets are not for the faint of heart. However, long-term investors may have some rest-easy plays in these blue-chip financial stocks.
When it comes to the Big Five, there are as many investment strategies as there are banks. Each top tier Canadian moneylender is a play for its own reasons. TD Bank (TSX: TD)(NYSE: TD), for instance, brings access to American market and satisfies a +5% dividend strategy, while RBC is a play for its sheer size, even if its yield is a little lower at 4.5%.
While growth potential isn’t a key factor when it comes to investing in financials, there is at least one name that satisfies this criterion. With strong emerging markets exposure, Scotiabank packs access to the domestic housing market. Known as Canada’s most international bank, Scotiabank is a play not only for its strong Latin American presence, but also access to Europe, Asia, and the Caribbean.
CIBC has the highest yield of any Big Five bank, currently serving up a juicy 6.1% yield. This name bounced 11% this week, showing just how highly valued moneylenders are in the current market.
However, when it comes to assets, names like CIBC and BMO are at the fuzzy end of the lollipop. Investors need to weigh systemic risk and consider looking beyond yield and fundamentals right now.
Investors should go large and long on bank stocks
The bullish mood in the markets right now adds up to a win. But there’s a disconnect between stocks and the actual economy. In the real world, the amount of risk right now is off the charts, which could be dangerous in the near-term.
Therefore, size matters in the current market. Asset valuation and market cap are increasingly key to the sustainability of a dividend portfolio.
TD Bank is one of two globally systemically important banks (G-SIB) in Canada, and was labelled as such last year by the Financial Stability Board (FSB). It’s also the second-largest bank in Canada per assets, but the distinction is almost nominal.
Per Statista, TD Bank commands assets of $1.415 trillion, pipped to the post by RBC’s $1.428 trillion, Canada’s other G-SIB. They are trailed by Scotiabank, BMO, and CIBC in that order.
Banks are still divisive, though, and there’s good reason for that. While the Big Five collectively pulled in $5 billion in the most recent quarter, all of them are down against last year’s results.
However, while profit loss in the most recent quarter might be alarming, loss provisioning makes these banks stronger plays in the long run.
Investors will need to balance this against the non-trivial risk of anther market crash.
