Canadian banking stocks have been performing pretty terribly these days. The market treats banking stocks pretty badly, especially after the subprime crisis in the United States over a decade ago. But honestly, Canadian stocks are quite different than their American counterparts.
There is an oligopoly of banks in Canada. While this can mean less competition and higher rates for Canadians, it also means more protection. Canadian banking stocks have provisions for loan losses that help them during these troubling times. So even with shares down, there’s simply not going to be a bank crisis. And there hasn’t been one since 1840!
So, does that mean now is actually the best time to buy Canadian banking stocks?
In short, yes!
If you’re wanting in on Canadian banking stocks, buy when they’re down. There are a few reasons. First, look at historical growth. These stocks have rebounded to pre-fall prices within a year of hitting rock bottom. This performance is pretty much across all the Canadian banks out there.
Furthermore, all Canadian Big Six Banks offer a pretty strong dividend. That dividend yield is far higher now that the share prices have declined. So, buying now also exposes you to more dividend income from a cheaper share price!
Finally, there’s the provisions for loan losses. About once a decade, the economy experiences a recession or at least a significant economic downturn such as the one we’re experiencing. These loan losses help these banks recover quickly. So you should see your shares climb back relatively quickly considering banks should get back to black quickly.
Which are the best?
Honestly, this is where things can get tricky. There are some Canadian banking stocks that have exposure to the United States, which long term can be a pretty great thing. However, the bank crisis experienced a decade ago in the United States still hangs heavy on investor minds. Because of this, Canadian banking stocks exposed to the U.S. could experience bad performance longer term.
Then there are emerging markets, which could also set up long-term shareholders for strong growth. Yet again, emerging markets tend to be going through recessions, as we speak. Further, political turmoil in many of these markets could cause growth to stop suddenly.
Yet if banks invest mainly in Canada, this can leave them underexposed to all these growth opportunities. It means tackling the heavy hitters of the Canadian market, and that can be quite difficult to do.
That’s why I’d say the best opportunity lies with banks that have significant investment in wealth and commercial management. Which is why right now, I think Royal Bank of Canada (TSX:RY) might be the best option among Canadian banking stocks.
Down, soon to climb
Royal Bank stock offers a quick turnaround thanks to its investment in wealth and commercial management, as well as in capital markets. These are long-term income streams that won’t simply disappear at a moment’s notice.
Now granted, shares dropped recently as Royal Bank stock reported earnings that fell below earnings estimates. Earnings fell pretty dramatically from the year before, down 14% year over year during the latest report.
Yet again, with shares now down 7% in the last year, and 3% year to date, it could be a solid time to pick up this stock. Especially while it trades at 12 times earnings, with a dividend yield at 4.44%. So consider this among Canadian banking stocks if you’re looking for a quick recovery and plenty of passive income.