The Canadian banks have enjoyed strong rallies in 2021, and investors who missed the surge are wondering which bank stocks still might be attractive picks. Let’s take a look at CIBC (TSX:CM)(NYSE:CM) and Royal Bank (TSX:RY)(NYSE:RY) to see if one deserves to be on your buy list.
CIBC is up 34% in 2021 and doubled off the 2020 low. The bank is the smallest of Canada’s five largest banks with a current market capitalization of $65 billion.
CIBC typically trades at a discount to its larger peers due to market perception that the bank carries more risk. Heavy exposure to the Canadian housing market is part of the concern, although this is also the reason the company has made so much money in the past decade.
CIBC finished fiscal Q3 2021 with $236 billion in mortgages and another $18.4 billion in home equity lines of credit (HELOC).
Delinquency rates on uninsured mortgages have fallen from 0.34% in Q3 2020 to 0.15% in the most recent quarter. Low interest rates and pandemic government aid programs have done a good job of enabling people to continue paying their mortgages.
As long as rates remain low and house prices continue to rise, CIBC’s mortgage portfolio shouldn’t be a concern. Real estate lending makes up 59% of CIBC’s total loan book, so the portfolio is well diversified.
Sectors hit hard by the pandemic such as leisure, retailers, and energy companies each make up 1% of CIBC’s total loans outstanding. On the consumer side, personal loans are 4%, credit cards account for 2%, and auto loans are 1%. These would be the segments to watch once the pandemic aid ends in the coming months. Further down the road, investors should consider the potential impact of rising interest rates. If mortgage rates jump by 2-3% in a short period of time, the Canadian housing market could be in for a rough ride.
CIBC recently spent $3 billion to buy Costco’s Canadian credit card business. Investors might also see the company do another deal in the United States to further diversify the revenue stream.
The stock trades near $145 at the time of writing compared to the 2021 high above $152. Investors who buy now can pick up a 4% dividend yield.
Royal Bank is the largest among the Canadian banks with a market capitalization of $185 billion. This puts it in the top 15 globally based on that metric.
Royal Bank gets its revenue from a broad range of activities and geographic areas. The bank has strong personal and commercial banking, capital markets, wealth management, and insurance operations. Royal Bank also relies on Canadian housing to drive revenue and profits. The bank finished Q3 2021 with $314 billion in residential mortgages and $35 billion in HELOC loans. These are big numbers, but the residential exposure is much smaller than CIBC on a relative basis.
Royal Bank trades near $130 per share compared to the 2021 high of $134. At the current price the stock provides a 3.3% dividend yield. Royal Bank’s share price is up 24% this year.
Is one a better bet?
CIBC and Royal Bank should both be solid picks for buy-and-hold investors.
However, if you are of the opinion that interest rates will spike in the next couple of years, it might be better to go with Royal Bank. In the event the housing market tanks, CIBC is likely to take a larger hit, and that would make the stock more vulnerable to a meaningful correction.
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.
The Motley Fool owns shares of and recommends Costco Wholesale. Fool contributor Andrew Walker has no position in any stock mentioned.