The Big Banks Predict Just a “Mild” Recession: Is it Safe to Buy Bank Stocks?

Banks like Toronto-Dominion Bank (TSX:TD) predict a “mild” recession. Is it time to buy their shares?

| More on:
Piggy bank wrapped in Christmas string lights

Source: Getty Images

Recession is the R-word that everybody is worried about this year. Polls show that most bank economists predict a mild recession early next year. The consensus is for a mere 0.4% gross domestic product (GDP) growth for the full year, with growth picking up in the second half.

This year, many people are selling stocks. The TSX index, the S&P 500, and the NASDAQ are all down for the year — the latter being down a truly staggering 31.25%. Some people are selling because of the expected recession; others are selling due to the growth-impeding interest rate hikes that have occurred. The two factors (interest rates and recessions) are interrelated, because high interest rates tend to slow economic growth down.

Here is an interesting question in this environment: what about the banks that are making these forecasts? The big U.S. banks got a big jump after they beat expectations in their third-quarter earnings releases. Canadian banks participated to a lesser extent. The most recent quarter’s results suggest that banks are doing well. But will they be able to survive the “mild” recession they’re forecasting?

What a “mild” recession could look like

In order to know how banks would fare in a mild recession, we need to know what a mild recession is. The word mild is ambiguous; if you talk to a big tech shareholder, they’ll tell you that the 2020 recession was mild. An oil worker would probably call it severe.

In objective terms, a mild recession would probably feature the GDP figure declining less than 1% for two quarters and a small increase in unemployment. In this situation, banks would likely face more defaults on credit cards and mortgages and issue fewer loans. That would cause earnings to go down but, because these business activities are cyclical, their earnings would rise again at some point in the future.

How banks could benefit

There are even some scenarios in which banks could rise in a recession — or, more accurately, rise due to the factors causing the recession. This year, central banks are raising interest rates. The rapid increase in rates is slowing down the economy, but it’s also causing bank interest income to rise.

In its most recent quarter, Toronto-Dominion Bank (TSX:TD) delivered the following:

  • $14.95 billion in revenue, up 35%
  • $6.67 billion in net income, up 76%
  • $3.62 in earnings per share (EPS), up 78%
  • $7.82 billion in operating income, up 68%
  • An 8% dividend increase

It was a pretty solid showing all around. Revenue increased, and earnings increased even more. Of course, part of this strong showing was non-recurring items related to TD’s buyout of First Horizon. If you exclude those one-time factors, then earnings only grew 5%. Still, the results were solid, even if you back out the deal-related things, so there is cause for optimism here.

One type of bank to avoid

Before concluding this article, I want to give one word of caution:

If you’re going to invest in bank stocks, I’d suggest that you think twice about investment banks like Goldman Sachs and Morgan Stanley. Investment banking has been the weakest banking sub-sector this year, and forecasts have it getting worse in the fourth quarter. What happened was tech stocks crashed, causing founders to not want to take their companies public. This, in turn, led to lower investment banking fees. It is what it is. Nevertheless, the overall banking sector looks strong heading into 2023.

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 Button has positions in Toronto-Dominion Bank. The Motley Fool recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.

More on Bank Stocks

Young woman sat at laptop by a window
Bank Stocks

Could BMO Stock Be a Big Winner in 2023?

Long-term investors should take a closer look at BMO stock as a potential core holding, especially on dips.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Tech Stocks

TFSA Passive Income: How I’m Investing to Make $2,000/Year From Dividends

I am increasing my dividend income by investing in dividend stocks like the Toronto-Dominion Bank.

Read more »

Make a choice, path to success, sign
Bank Stocks

Of the Big 6 Bank Stocks: Buy This, Not That

CIBC (TSX:CM) is an interesting Big Six bank stock to buy right now.

Read more »

question marks written reminders tickets
Bank Stocks

Could BNS Stock Be a Big Winner in 2023?

Bank of Nova Scotia stock still appears oversold. Is now the right time to buy?

Read more »

Gold medal
Bank Stocks

Could TD Stock Be a Big Winner in 2023?

TD stock is still down from the 2022 highs. Is this a good time to buy?

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Is Now the Right Time to Buy Banking Stocks?

TD Bank stock is still riding high, despite the very difficult environment that it and all banking stocks are facing…

Read more »

Payday ringed on a calendar
Bank Stocks

How to Create $500 in Passive Income Each and Every Month

Combining your TFSA with a covered call ETF can create some very lucrative passive-income streams.

Read more »

woman data analyze
Bank Stocks

BNS Stock: Here’s What’s Coming in 2023

Here's what investors and market participants should look for in 2023 when it comes to Bank of Nova Scotia (TSX:BNS)…

Read more »