Canadian bank stocks took a massive hit to the chin again last week, as the round of quarterly earnings results came flowing in. Though CIBC (TSX:CM) managed to deliver a solid number, bucking the trend, others folded under sub-optimal results. Indeed, CIBC deserves a round of applause after delivering a second quarter (Q2) that sparked a bit of a bounce. For the most part, this bank earnings season has been a forgettable one. However, I wouldn’t yet give up on the broader basket, as their share prices sink while their dividend yields continued to creep higher.
A recession could certainly bring forth more provisions for credit losses. But at this juncture, I think many investors have already braced for sluggish times. The real question is whether estimates are now at a level where the headwind-hit banks can actually surpass estimates.
The banking sector really got rocked this year. As the economy falls into a “mild” or “shallow” recession, the pains for the big banks may not drag on for too long a duration, especially if the rise of artificial intelligence (AI) is able to save the economy from a particularly nasty contraction.
Though CIBC looks like a major winner of the group, it’s not my favourite of the group. The best bank for your buck may change at any given time. And today, I think there’s more value to be had in the Canadian banks that have been sent to the penalty box over their U.S. regional exposure.
Big bank bargains after recent earnings?
Indeed, U.S. regional banks have been a place to avoid following the failure of SVB Financial. There has been quite a bit of drama following the regional banking crisis. TD Bank (TSX:TD) walked away from its merger with First Horizons (NYSE:FHN). The move made headlines. And while walking away will entail consequences (financial and reputational), the tough decision was the right one.
In prior pieces, I’ve praised TD for saying “no” to the deal. Further, I’ve viewed the U.S. banking crisis as an event that “showed the hands” of many players in the regional banking scene. Valuations nosedived, as new potential risks surfaced.
TD stock clocked in some ugly results for its Q2. Adjusted earnings per share (EPS) came in at $1.94, below the $2.07 estimate. TD’s chief executive officer Bharat Masrani remarked on “robust customer originations and loan volumes.” Still, TD can’t catch a break, with the stock now back at $78 and change per share, just shy of a 52-week low.
Robust banks with 5% dividend yields
With a yield that’s just shy of 5%, I view TD stock as a bargain with wonderful managers and ample capital to put to work (likely in the form of dividend hikes). The quarter was not pretty. But nobody expected it to be. Though it will take at least another few quarters to weather a recession storm, I’d not be afraid to punch my ticket here (at $78) for that swollen dividend.
Similarly, Bank of Montreal (TSX:BMO) missed the mark in its latest earnings, with $2.93 in adjusted EPS, which is below the $3.20 estimate. More than $1 billion in provisions for credit losses were less than ideal. In any case, BMO stock also looks like a bargain for investors with a more than three-year horizon. With a more than 5.1% yield, I view BMO stock as one of the most attractive passive-income plays on the TSX today!
