AI stocks have been running hot lately. Between NVIDIA’s two-year market beating run and more modest runs from other ‘Magnificent Seven’ stocks, they’ve gotten quite pricey. It’s a different story with banks. Although many of them are growing just as much as AI companies are, they are dirt cheap. In this article, I will explore three bank stocks I’d buy instead of chasing after AI money.
EQB Inc
EQB Inc (TSX:EQB) is the biggest growth story among Canadian banks. Its revenue is up 39% in the trailing 12-month (TTM) period, and even more over the last five years. Despite all of its growth, EQB stock still only trades at seven times earnings.
I have a theory on why EQB is so cheap despite all the growth. It has to do with liquidity. Although the company’s liquidity coverage ratio (339%) is high, the absolute amount of liquidity compared to deposits is only 10%. The high liquidity coverage ratio is partially attributable to the fact that most of the company’s deposits are GICs, which are “locked up” for periods of time. EQB’s assertion that this money can’t be withdrawn on demand is true, but I’d imagine that if EQB ever faced a flurry of people attempting to somehow exit their GICs early, it would negatively impact the bank’s stock price, if not its fundamentals. So, that’s one risk to watch out for.
TD Bank
If you’re looking for a contrarian value pick to buy right now, you’d be hard pressed to find one that fits the bill better than the Toronto-Dominion Bank (TSX:TD). This bank’s stock absolutely plummeted on Friday after the Wall Street Journal reported on the bank’s money laundering scandal. The scandal had been public knowledge for some time, but the WSJ’s report uncovered some details that weren’t widely known. TD recovered a bit on Monday, but not so much to regain all of its Friday losses. The stock remains cheap.
TD is definitely a riskier than the average bank stock right now, but with high risk comes the potential for high returns. I think that the markets are overestimating the risk to TD stemming from the current investigation, the potential cost of which has been estimated at $2 billion. TD earns over $10 billion a year, so that’s not a crippling sum of money for the company. But because of the sell off, the stock now trades at less than 10 times earnings. For my money, it’s a pretty intriguing buy.
National Bank
Last but not least, we have National Bank (TSX:NA). This is the smallest of Canada’s Big Six banks. It is growing pretty quickly by the standards of its peers. In its most recent quarter, it reported $922 million in net income and $2.59 in diluted earnings per share (EPS), both figures up 5% year over year. The growth in that quarter was not exceptional, but it was at least positive. The growth over the last three years was pretty strong. In that period, the bank delivered:
- 10.2% revenue growth.
- 15.3% net income growth.
- 15.4% growth in diluted EPS.
Overall, it has been an above-average period of growth for Canada’s smallest big bank. Its stock might be worth buying today.
