The regional banking crisis in the states has been quite anxiety-inducing for many. It’s not yet clear when the worst of that storm will be over. Regardless, every regional bank that fumbles the ball will likely cause some considerable pressure on the financial scene.
Undoubtedly, broader markets could retreat lower again if there’s another shoe to drop. In any case, I do think regulators have done a fine job of preventing some sort of contagion. The last thing the economy needs is a big bank crisis as the Fed continues raising interest rates to do away with inflation.
Regional banking volatility may be an opportunity for deep-value investors
Indeed, there were casualties from recent rate hikes. Inflation is a tough beast to slay. However, in due time, I do think investors need not fear the second coming of the 2008 Great Financial Crisis. The big banks south of the border look steady, unlike their smaller regional counterparts.
Further, the big Canadian banks are among the best managed on the planet. In that regard, any rumbles caused by another U.S. regional bank run may be somewhat less noticeable on this side of the border.
In any case, I view Canada’s regional banks as potential value opportunities for investors who are willing to roll with the punches (or volatility) that could continue coming their way.
Regional banks are unloved right now. Given the high capital requirements for Canada’s banks, I view recent volatility as just a tad excessive, in my opinion.
Undoubtedly, the smaller regionals will be a choppier ride than their bigger brothers. But they may be richer with value, especially when times get tougher, and sentiment begins to sag. Let’s check in with two regional Canadian banks to see how they’ve fared over the last two months of banking carnage.
Canadian Western Bank
Canadian Western Bank (TSX: CWB) is an Edmonton-based regional bank that serves a wide range of clients in Canada’s western provinces. Undoubtedly, the bank is heavily exposed to the province of Alberta, which is more tied to the energy patch than startup tech.
At writing, CWB stock is off around 41% from its 2021 highs of around $42 per share. Recent banking rumbles in America aren’t helping. In any case, I do think the stock looks intriguing while it looks to bounce off of a strong level of support around $23 per share. Today, shares go for 7.3 times trailing price-to-earnings, with a 5.24% dividend yield. That’s not a bad price to pay for what I view as a technically sound bank with a lot of recession risk priced in during the 2022 slump.
Sure, you can get more yield from some of the Big Six banks. But I do think investors should be willing to consider the well-run regional if they seek exposure to Canada’s robust west coast. Undoubtedly, it’s very much different from America’s west coast.
Laurentian Bank
Laurentian Bank (TSX: LB) is another Canadian regional that really fell under pressure over the past year. The March wave of bank jitters sent LB stock back to the low $30 range. At 6.6 times trailing price-to-earnings, with a 5.75% dividend yield, LB stock stands out as an even deeper value play than CWB.
The Quebec-based bank may have its own idiosyncratic issues, but I do think the stock has become so incredibly cheap that it may not take much improvement to help fuel a robust bounce-back. Laurentian faces significant challenges, as profits slip.
With such a depressed price of admission, though, expectations seem a tad too low.
