Bank Stocks: I’m Buying the Panic-Driven Dip

I have been using this banking panic to load up on shares of Toronto-Dominion Bank (TSX:TD) and Bank of America (NYSE:BAC).

| More on:
hand using ATM

Image source: Getty Images

The past month has witnessed a true panic in banking stocks. It all got started when Silvergate Bank, a bank catering to the cryptocurrency industry, failed. Shortly afterward, Silicon Valley Bank and Signature Bank failed, while Credit Suisse was saved at the last minute by a buyout from another Swiss bank UBS.

As you can imagine, a lot of bank shareholders are feeling nervous right now. With these failures spreading from one bank to the next, there is significant fear of a “contagion” like the one that brought down several large banks in 2008.

Fortunately, the situation isn’t so dire this time. The collapsing small/mid-sized banks are providing a flow of new deposits to big banks, which are becoming more robust than ever. Nevertheless, the big banks are falling right along with their beleaguered mid-sized cousins. It looks like there’s a valuation discrepancy here. In this article, I will explore the bank stocks I’m buying to take advantage of this ongoing dip.

What I’ve been buying

The main bank stocks I have been buying during this panic driven dip are Toronto-Dominion Bank (TSX:TD) and Bank of America (NYSE:BAC). I also made a small purchase of shares in MSCI China Financials ETF — a fund of Chinese bank and insurance stocks.

Why do I like these particular bank investments?

Well, for one thing, TD and BAC are both big banks — the type that is gaining deposits at the expense of the smaller ones. For another thing, none of the bank investments I have bought are at risk of liquidity issues. The banks mentioned above have liquid assets near 50% of their deposit base. So, it would take a truly colossal bank run to bring them down.

TD Bank currently has 46% of the liquid assets that would be needed to pay off all of its depositors. It also has a large $1 trillion loan portfolio that brings in some cash flow each year. The bank’s own loans can’t just be “sold” quickly, but they do provide some regular cash that would help with paying depositors if needed. So, it’s in a relatively good place.

Bank of America has 50.5% of the cash and liquid securities needed to pay off its depositors. Here I’m just talking about the cash and bonds that BAC owns. I’m not counting securities held in its investment banking division, or being held under repurchase agreements. So, Bank of America has enough securities that it’s free to do what it wants with to pay for more than half of its deposits.

One risk to watch out for?

As I showed above, there are many banks whose balance sheets show low risk levels, even in this uncertain environment. They could be good dip buys. Nevertheless, investors will want to watch out for central banks hiking interest rates even further. If they do so, it will cause the fair value of the banks’ assets to decline. That will make it increasingly harder for the banks to meet their liquidity needs. So, it’s a real risk to the banking sector at the moment.

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.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Fool contributor Andrew Button has positions in Toronto-Dominion Bank, Bank of America and MSCI China Financials ETF. The Motley Fool recommends Bank of America. The Motley Fool has a disclosure policy.

More on Investing

A worker overlooks an oil refinery plant.
Energy Stocks

Where to Invest in Oil Stocks in June 2023

Suncor Energy is a Canadian oil stock that's set up to benefit from strong oil prices, as it trades at…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Passive Income: How to Make $90 Per Month Tax Free

You can add this amazing Canadian monthly dividend stock to your TFSA now to generate $90 in tax-free monthly passive…

Read more »

A golden egg in a nest
Dividend Stocks

Investing for Retirement? Check Out These Dividend-Paying Stocks in Canada

Dividend-paying stocks like First National Financial are on sale in June 2023.

Read more »

The sun sets behind a high voltage telecom tower.
Dividend Stocks

Fortis Stock Is a Steady Dividend Player for Your Energy Portfolio

You can rely on Fortis stock for growing dividend income. Aim to buy the stock on market corrections to boost…

Read more »

Family relationship with bond and care

TFSA Investors: Get Ready for Retirement With These Top Stocks

Here are three Canadian stocks to consider right now. 

Read more »

financial freedom sign

Retire on Your Terms: 3 TFSA Stocks for Financial Freedom

Are you in the market for stocks you can hold in a TFSA? Here are three top picks!

Read more »

A plant grows from coins.

Don’t Miss Out on the American Dream: Invest in the S&P 500 for Long-Term Wealth

Canadian investors can chase their own version of the American dream if they choose to snatch up BMO S&P 500…

Read more »

Path to retirement
Dividend Stocks

Investing for Retirement? These Dividend Stocks Can Help You Get There

TD Bank and Brookfield Renewable Partners are two solid dividend-growth stocks to hold for decent total returns through retirement.

Read more »