2 Bank Stocks to Load Up on in a Recession

These Canadian bank stocks appear undervalued today.

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Canadian bank stocks took a hit in 2022 amid rising recession fears for 2023. The pullback in some of the banks appears overdone, and investors who missed the big rally off the 2020 crash are looking for contrarian picks to add to their buy-and-hold retirement portfolios.

Bank of Nova Scotia

Bank of Nova Scotia (TSX:BNS) trades below $68 per share at the time of writing. The stock is down 25% in 2022 and now trades at just 8.45 times trailing 12-month earnings. This is the kind of multiple one might expect to see during a financial crisis.

Bank of Nova Scotia generated solid fiscal 2022 results. Adjusted net income came in at $10.75 billion for the year compared to $10.17 billion in 2021. The international operations continued to rebound from the pandemic slump, and the Canadian banking group saw good gains from residential mortgages and business banking loans. These segments could be in for a rough ride in 2023, but the division should still deliver decent profits.

Bank of Nova Scotia increased the dividend by 11% in late 2021 and by another 3% when the company released the second-quarter (Q2) 2022 results. The current quarterly payout of $1.03 per share provides an annualized yield of about 6% today.

A deep global recession would likely hurt the results in the international operations primarily located in Mexico, Peru, Chile, and Colombia. These countries rely on strong oil and copper prices for revenue, so a dip in commodity markets caused by an economic slowdown would be negative.

CIBC

CIBC (TSX:CM) trades for close to $57 per share compared to the 2022 high around $83. The stock is down more than 23% on the year and now offers a 6% dividend yield. With a trailing 12-month price-to-earnings multiple of 8.55, CM stock also appears undervalued right now.

Investors are concerned that CIBC could take a bigger hit than its peers in 2023 or 2024 as a result of exposure to housing. The bank has a large Canadian residential mortgage portfolio relative to its size and a meltdown in the property market caused by a wave of defaults could put CIBC in a tough spot.

For the moment, however, economists expect a mild and short recession in 2023. This should result in a modest increase in unemployment. Companies currently can’t find enough staff, so it will take time for the jobs market to rebalance, even in a weakening economy. As long as people have work, they can normally pay the mortgage.

CIBC generated $6.6 billion in adjusted net income in fiscal 2022 compared to $6.7 billion in 2021. Weakness primarily came from the U.S. commercial banking and wealth management operations that saw a 17% drop in adjusted net income compared to 2021.

The board just announced a small dividend increase. It was the second hike in 2022, so management can’t be overly concerned about the profits outlook.

The bottom line on cheap bank stocks

Additional volatility and downside could be on the way in the coming months, as the market gets a better sense of the recession risks.

That being said, Bank of Nova Scotia and CIBC already trade at discounted prices and deserve to be on your radar. The dividends offer attractive yields, and the payouts should be safe.

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 recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

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