A U.S. Bank Stock Just Tanked: Is Canada Next?

A U.S. bank stock just plunged from downgrades, so how are Canadian bank stocks faring, and could they be next on the chopping block?

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If you thought we were out of the woods when it came to bank stocks, think again. A year after Silicon Valley Bank went bankrupt, shares of New York Community Bancorp (NYSE:NYCB) fell 9.5% before the bell this week. They then went on to fall a further 7% after the opening of the market.

The fall came after more analyst ratings came in, downgrading the stock after a quarterly loss. Further, more losses could come. So, let’s look at why the downgrade happened and whether Canadian investors should be fearful about our own bank stocks.

What happened?

NYCB stock fell from a surprise quarterly loss, but the main fear was that even more losses could be reported in the future. This came as the stock put aside enormous provisions for the potential of bad loans that were mainly connected to commercial real estate.

Moody’s went on to downgrade the stock this week to a “junk” status credit rating after the earnings report. The downgrade came as the company saw severe challenges facing NYCB stock — specifically, that it may not be able to repay its debt holders.

The perfect storm of losses from commercial real estate, earnings losses, and multifamily properties all contributed to lower investor confidence. Moreover, the downgrade will likely cause the company to struggle even more in the future. That’s because it could raise borrowing costs even higher.

Are Canadian banks next?

The big question on Canadian investors’ minds is whether Canadian banks could suffer the same fate. And with earnings right around the corner for the Big Six banks, it’s a fair question. So, what do analysts foresee for these stocks?

In short, “the quarter will be fine.”

These were the words of one analyst who believes that there will be a lot of “noise” after quarterly earnings. This would include looking at rate expectations, credit, commercial real estate, tax rules and more — especially for banks who are sensitive to the United States. This could cause a year-over-year decline in cash earnings for the Big Six banks from higher expenses and normalized credit trends.

Yet overall, the banks should remain stable, with maybe some pressure from U.S. performance. So, what should Canadians avoid, and where should they park their cash?

Which big banks to back?

If you’re wondering about which Big Six banks to avoid and which to back, analysts believe there are some answers. One to avoid for now would be Toronto-Dominion Bank (TSX:TD). TD stock continues to have U.S. anti-money laundering issues that will certainly continue to put pressure on the stock. So, until these are dealt with, it looks like TD stock will have a lot of costs in the future.

A stock to keep your eye on right now would be Canadian Imperial Bank of Commerce (TSX:CM). CIBC stock may offer a huge dividend, but it also is heavily invested in Canadian real estate. While this segment should rally eventually, it’s still going to put pressure on the stock in the meantime.

But one to buy could be Royal Bank of Canada (TSX:RY) now that RBC stock has been approved to integrate HSBC Canada. So, investors will want to look out for any news on when HSBC will be fully integrated into the bank. Further, it remains the biggest of the Big Six Bank and only getting bigger with this recent acquisition.

Overall, the U.S. may have some problem banks, but here in Canada, we’re doing just fine. While there may be some noise during the next quarter, these bank stocks are still solid long-term holds offering value today — not to mention solid and growing dividends.

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.

Fool contributor Amy Legate-Wolfe has positions in Canadian Imperial Bank Of Commerce, Royal Bank Of Canada, and Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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