Volatility from last year hasn’t yet dissipated, with shockwaves going from the tech sector to banking. Indeed, nothing less than volatility should be expected for the rest of the year, as central banks tackle inflation, while the aftermath of the collapse of SVB (Silicon Valley Bank) dampens investor confidence. Whether the Federal Reserve pauses in response to regional banking failures will be the major market mover going into the month’s end.
In this piece, we’ll focus on two Canadian bank stocks that I think are worth grabbing on the way down. Now, the big banks could continue to tumble as we get closer to a mild recession. Regardless, history suggests that sticking with the top-tier Canadian bank stock through trying times is a good idea. Cheaper valuations and more yield is never a bad thing. Just be ready to deal with further downside risk. Even if mostly idiosyncratic issues are weighing on banks like SVB, investors in the big Canadian bank stocks could be hit with a few underwhelming quarters.
Rising provisions and lagging loan growth could be a major drag on big bank earnings. Still, after the recent selling storm, I think expectations are a tad too conservative, making it possible for a top bank stock to beat, even as earnings continue to feel the pull of macro headwinds.
Consider Canadian Imperial Bank of Commerce (TSX:CM) and Laurentian Bank of Canada (TSX:LB): two cheap bank stocks that got a whole lot cheaper over the past week!
Canadian Imperial Bank of Commerce
Canadian Imperial Bank of Commerce (or CIBC) recently fell just shy of 10% from its early March peak and is at risk, like its Big Six peers, of returning to 52-week lows. Undoubtedly, CIBC stock took such a massive hit to the chin during the Great Financial Crisis. It took around seven years to recover from the 2007-08 crash. Indeed, mortgages were the sore spot back then.
More than a decade later, CIBC is a very different bank. It’s better able to tackle the next recession (which could be just months away) without taking too hard a hit to the chin. Now down around 30% from its all-time high, CIBC stock goes for 11.1 times trailing price to earnings with a 6% dividend yield.
CIBC may not be the cheapest bank, but it’s certainly a compelling play for dividend seekers who seek greater exposure to the domestic market. Indeed, a Canadian recession could prove milder than a U.S. one, especially as the U.S. Federal Reserve continues hiking interest rates.
U.S. banking exposure is seen as worthy of a premium. Nowadays, with U.S. banks taking the most damage, investors view greater domestic exposure as preferable. Though CIBC broke into the U.S. market, its exposure is limited versus some of its bigger brothers.
Laurentian Bank is a Quebec-based regional bank that’s faced considerable pressure in recent weeks. The stock is down around 48% from its 2017 all-time high and is at risk of making a return to those 2020 lows. Indeed, Laurentian Bank is one of the biggest laggards in the Canadian banking scene. Still, it’s hard to overlook the value to be had after the stock’s latest spill. At 6.3 times trailing price to earnings, LB sports a 5.9% dividend yield.
Just a few weeks ago, the bank saw profits fall 6% to $51.9 million. Despite the underwhelming growth, the regional bank topped analyst expectations. Still, investors just don’t have the appetite for the bank stocks right now, especially the regionals. I think Laurentian is a deep-value play but one that begs for investor patience.