The Canadian banks got a nice boost on Wednesday, as markets rocketed on the back of a dovish tilt from the U.S. Federal Reserve. Though lower interest rates may not be, in itself, the best thing for the big banks, I think that the odds of a soft landing have increased drastically. In any case, a lack of recession (or a short-lived one) couldn’t be more positive for the big banks, many of which have braced for a downturn for numerous quarters now.
Undoubtedly, it feels like a slowdown of sorts has already arrived! In any case, the banks have been in recovery mode since the market bottomed back in October. And I think the banking scene is full of value for those looking to grab a nice yield for the long haul.
Lower rates, lower inflation ahead?
Many investors have likely been on edge over elevated rates and what remains of high inflation. With inflation retreating, it should come as no shocker that the Federal Reserve is open to a trio of rate cuts in the new year. The economy has been on wobbly legs, after all. And as inflation fades away, rate cuts may just be able to put the economy on some stronger footing.
Without further ado, let’s look at two banks that are at or around the top of my watchlist as rate fears begin to ease.
TD Bank
TD Bank (TSX:TD) was a scary stock to own earlier this year when regional banks in the states were under serious pressure. At the time, TD was in the running to acquire one of the regional banks in First Horizons — a deal that was ultimately terminated in the heat of the regional banking chaos. This provided a bit of relief to shares of TD initially.
In the following months, though, TD stock lagged pretty badly. As it stands today, the bank is likely overcapitalized after not following through on any major acquisitions, making the bank a “steady ship” that can sail through a rough patch without toppling over.
Indeed, I’d like to see TD pursue a regional deal down south in the new year. But I don’t think we’ll get a deal. That is unless the banking sector is in for an unpleasant surprise.
With a 5.03% dividend yield and recent hiring in the investment banking side, I view TD stock as a bargain that can fare well, regardless of what rates do next year.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is a dirt-cheap Canadian bank that may be most appealing to the deep-value crowd and the passive-income seekers. Sure, the bank has been under a storm of headwinds, but who can resist a dividend yield close to the 7% mark? Indeed, Bank of Nova Scotia stock also has its international exposure (think the Latin American business), making it a great way to diverify from a geographical perspective.
At writing, the stock goes for 10.54 times trailing price to earnings. Underwhelming quarters have acted as a drag on the stock. But with low expectations, I believe, comes a greater chance of impressing. Sure, it’s hard to imagine the $75.4 billion bank impressing in today’s rocky environment. Regardless, I think a bet on BNS stock will pay off in five years’ time.
