“Four Biggest U.S. Banks Low $52 Billion in Market Value”: This is an eye-catching title of an article published by Wall Street Journal about 17 hours ago as of writing. Surely, it’s a staggering amount of money evaporated in the stock market in a single day yesterday. In early trading today, the four big American bank stocks JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo continued to lose altitude. However, they quickly regained their footing and turned green.
Apparently, the selloff seemed to have been triggered by problems at Silicon Valley Bank, which trades as SVB Financial (NASDAQ:SIVB). In a press release on Wednesday, the bank revealed it sold about US$21 billion of securities from its securities portfolio, which will result in an after-tax loss of about US$1.8 billion for the first quarter. Financial Times wrote SVB “offloaded [the securities] in response to a decline in customer deposits.” This news has investors worried about the soundness of other U.S. banks. The ripple has hit Canadian bank stocks, too, which is why they have experienced selloffs this week.
The Canadian banking system is well regulated and built to be safe and sound. Particularly, the big Canadian bank stocks are some of the most solid long-term investments. They survived through the 2007-2008 financial crisis and the pandemic and came out with substantial gains after massive corrections.
Why I invest in Canadian bank stocks instead of U.S. banks
Together, the Big Six Canadian banks hold about 90% of Canada’s banking deposits. The oligopoly is able to make solid profits, even during economic downturns. These big banks have core businesses in Canada. Generally, around 50% of their business is domestic.
The sixth-largest Canadian bank, National Bank of Canada is even more focused domestically, generating about 80% of revenues from Canada. Likely because of its large Canadian exposure, it has seen the least downside alongside the largest Canadian bank stock, Royal Bank of Canada, by market capitalization. Both stocks are down more or less 2.5% since Wednesday. Royal Bank’s resilience is likely due to its diversified business across personal and commercial banking, wealth management, capital markets, and insurance.
Bank of Nova Scotia and Toronto-Dominion Bank stocks have been hit the worst with dips of close to 4% since Wednesday. Scotiabank seems to always be the dog of the group but offers the highest dividend yield, which could appeal to income investors. At writing, it offers a juicy yield of almost 6.3%.
One key factor that I invest in Canadian bank stocks instead of U.S. bank stocks is because of the dividend tax credit. In other words, the dividends from Canadian bank stocks are taxed at lower rates than U.S. dividends that are taxed as ordinary income for shares held in non-registered accounts.
Investor takeaway
Canadian investors should take the opportunity to buy the dip in their favourite big Canadian bank stocks, as the weakness has little (if not nothing) to do with them. The big Canadian banks are well capitalized and are solid long-term investments as a part of a diversified portfolio. If you’re not sure which to buy, invest in all of them through BMO Equal Weight Banks Index ETF to take advantage of the dip!
