Canadian banks hit a road bump on Tuesday, with TD Bank (TSX: TD)(NYSE: TD) and Bank of Montreal (TSX: BMO)(NYSE: BMO) plunging over 3% and 0%, respectively. Indeed, the latter bank was treading water before finishing the day in the grey.
With rates pulling back drastically over the crisis going on in Ukraine, it’s not a mystery as to why the big financials have been under a bit of pressure. The ones with exposure to Russia crumbled, while other banks lacking such exposure fell in sympathy. In any case, I think that a slower-than-expected rate-hike schedule and concerns over higher inflation are not a reason to throw in the towel on the top Canadian banks, especially TD, which I view as one of the most undervalued right now.
As we head into late 2022, many question marks will be cleared up. Currently, fear is in the air, with Ukraine-Russia negotiations going nowhere. With oil spiking over US$100 (a boom I called for in 2020, when almost everyone was ready to give up on WTI), inflationary pressures could mount further. Indeed, the last thing the Fed wants to see is even more inflation.
Fears mount and tensions rise
Undoubtedly, Fed chairman Jay Powell looks to have been wrong. With the man falling behind the curve, I think he’ll have to follow through with rate hikes just because of mounting inflationary pressures that could be worsened by the Ukraine-Russia crisis.
Further, supply-chain issues could continue for at least another quarter or two. And, of course, the return of COVID is a real risk that we probably won’t know the full extent of until either late summer or early fall. Indeed, investors are all but ready to move on from COVID. Still, it is worth noting that a move into endemic may or may not happen this year. Indeed, reopening stocks have been sagging of late, despite the retreat of Omicron.
I know. There’s a lot to worry about. But you shouldn’t panic. I think the Fed will hike rates, but perhaps at a less-rapid rate. At least that’s what the 10-year note seems to suggest. Could this alleviate some pressure on high-multiple tech? It could, but the real question is whether corporate earnings will continue strong. I think it will. Consumer sentiment is still robust, with Canadian GDP rising by 6.7%. That’s incredible growth, and I don’t think the economic recovery from COVID is about to stop, even with rates on the rise. Bank of Canada is ready to hike rates, and with the economy experiencing resilient growth, I think the banks have a Goldilocks environment up ahead.
Bank of Montreal: Top Canadian bank stock to buy right now
Indeed, for the banks, a strong economy and higher rates could mark the start of a multi-year bull run. Both TD Bank and BMO are solid Canadian banks with remarkable, growing U.S. banking exposure. TD is a retail-flavoured bank with a strong management team, while BMO is more of a corporate lender with equally talented managers running the show.
Currently, Bank of Montreal is one of my favourites of the Big Six. It has the oil and gas (O&G) exposure that it was slammed for in the early days of 2020. Suddenly, O&G is the place to be. WTI could hit US$120 per barrel, and if it does, BMO’s corporate clients will be in great shape, more willing to take on loans. As rates rise, BMO seems like an incredible bargain at these levels. The current valuation doesn’t do it justice. It’s the best bank for your buck, I think.
