Canadian bank stocks have continued sagging in the back half of last week, thanks in part to broader banking sector volatility. Indeed, the failure of Silicon Valley Bank sent shockwaves across the broader markets. Other regional U.S. banks fell under considerable pressure. This pressure was felt in Europe as well as Canada.
With many Canadian bank stocks plunging violently as a result of the Silicon Valley Bank aftermath, brave bargain hunters may just have a chance to catch the swelling dividend yields. Of course, it’s hard to be bullish about the banks, as perceived risks mount ahead of a recession. As you may know, Canada’s big banks are well capitalized and ready for hard times.
However, that doesn’t mean loan losses and other recession-driven issues won’t act as a major drag on bank shares. The Canadian banks are terrific long-term bets, especially if you’re looking to fund a passive-income stream with your TFSA (Tax-Free Savings Account). However, it’s worth noting that they tend to be choppy movers when the lights on the economy begin to dim.
Canadian bank stocks under pressure
Right now, the failure of select tech-exposed regional banks seems daunting. But it’s important to remember that a few bank fumbles do not necessarily mean we’re in for 2008 all over again. The risk of a big bank failure in Canada remains incredibly low. With robust capital reserves in place and diversified loan books, Canada’s Big Six behemoths don’t have the same single source of failure as the regionals in Silicon Valley do.
As such, I think it’s a smart time to consider Canadian bank stocks, as they touch new 52-week lows.
Scotiabank (TSX:BNS) and Royal Bank of Canada (TSX:RY) are two solid options that are probably oversold at this juncture.
Scotiabank
Scotiabank is Canada’s most internationally diversified big bank, with a good mix of domestic and Latin American exposure. Though emerging markets exposure can help the big bank deliver superior returns on investment over the long haul, it can also add to investor anxiety when the world economy heads south. Higher risk can equal higher reward.
The stock has been punished for over a year now, currently down around 30% from its peak. After the past few weeks of industry pressures, BNS stock is sitting at a support level in the mid-$60 range. As banking fears are put to rest, I think the name stands out as a value bet here.
Nobody knows if more regional banks will fail in the U.S. or Europe. Regardless, BNS stock looks to have a great risk/reward scenario here. At 9.1 times trailing price to earnings, with a 6.32% dividend yield, there’s too much risk (and likely fear) baked in — unreasonably so, in my opinion.
Royal Bank of Canada
When the tides get rough, investors should stand by quality names. Royal Bank is at the very top of the TSX Index, with a $177 billion market cap. The bank is more than ready for a downturn. The bank expects that Canada will enter a “mild” recession in the middle of this year. It’s had more than enough opportunity to prepare.
Ultimately, I think Royal Bank is one of the quality blue chips that’s been unfairly tossed aside by investors. The stock is now down around 15% from its high. That’s far less than many of its Big Six peers. Regardless, I think the 12.1 times trailing price-to-earnings multiple is price to pay for one of the kings in Canadian banking. The yield sits at 4.1%.
