The past week saw a major dip in bank stocks the likes of which we hadn’t seen since 2008. Small banks crashed the hardest of all, while big banks declined in price to a lesser extent. Much of the selling in small banks was justified: they, in many cases, went broke shortly after falling in price. It’s less obvious why big banks declined along with their regional cousins. Big banks were beneficiaries of the small bank fallout, receiving new deposits from banks that had collapsed. According to The Globe and Mail, big Canadian banks are even picking up some of Silicon Valley Bank’s Canadian clients! If you’re unaware, Silicon Valley Bank was the second bank to collapse in the recent wave of U.S. bank failures, and the one that got the most publicity.
So, we’re in a situation where big banks are getting stronger at the expense of small banks. That would seem to argue in favour of investing in big banks. In this article, I’ll explore three big banks I’d buy on the dip.
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Royal Bank of Canada
The Royal Bank of Canada (TSX:RY) is Canada’s biggest bank by market cap. With $1.7 trillion in assets, it’s a real giant.
Why is Royal Bank looking like a good dip buy here?
Put simply, because it has fallen in price, despite not being meaningfully exposed to the issues currently affecting the banking sector. The reason small banks are struggling is because people are withdrawing too much money (i.e., there’s a bank run happening). Evidence shows that they are taking the money out and putting it into big banks. So, Royal Bank is likely benefitting from the current situation, not being harmed by it.
How was Royal Bank doing before all this banking controversy? Pretty well, actually. In its most recent quarter, it grew its revenue by 12.5% year over year, and its adjusted earnings by 7%. Not a bad showing by the standards of 2023 at all.
Bank of Montreal
The Bank of Montreal (TSX:BMO) is another one of Canada’s big six banks. It isn’t as big as Royal Bank of Canada, but it has much better historical growth. Over the last five years, it has grown its revenue by 7.9%, earnings by 17.6%, and earnings per share by 17.1% – all figures on a per year basis. By contrast, Royal Bank of Canada has only grown its revenue by 4.3% per year over the same period.
Of course, a track record of growth doesn’t mean that future growth will be good. However, there is a good chance that BMO’s future growth could be decent. That’s because BMO recently bought out Bank of the West, a mid-sized bank in California. It’s a deal that will add about $1 billion a year to BMO’s net income. Despite its middling size, Bank of the West is not similar to the small U.S. banks that collapsed this month, as it is a former subsidiary of BNP Paribas, not an independent bank. It should be safe in BMO’s hands.
TD Bank
Last but certainly not least, we have Toronto-Dominion Bank (TSX:TD). This is one Canadian bank stock that I already own!
TD Bank is similar to Bank of Montreal in being one of the faster growing Canadian banks. Over the last five years, it has grown revenue by 7% per year and earnings by 8.8% per year. These figures are strong by the standards of banks.
TD Bank has a deal of its own this year. It’s buying the U.S. bank First Horizon for $13.4 billion. The deal has been delayed many times, but TD says it’s still fully committed. It would add about $1 billion a year to TD’s earnings if it closed.
