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The failure of Silicon Valley Bank (SVB) and the hasty sale of Credit Suisse to rival UBS sent shares of financial institutions around the world tumbling. Is it a good time to buy bank stocks?
Over the past month, Canada’s six largest banks have lost more than $60 billion in market value. National Bank shares were down 5% and Royal Bank shares were down 7%.
TD gets roughed up
But it was the shareholders of the two institutions most present in the United States who suffered the most: the title of TD Bank lost 15% and that of Bank of Montreal, nearly 12%. About 40% of TD and BMO deposits are south of the border.
Canadian bank stocks are currently trading at a 17% discount to their 10-year average valuation, according to a recent report from CIBC Capital Markets.
The more cautious banks
Why is that ? Even if there were no massive withdrawals in Canadian banks as we saw in the United States, the crisis which began with the collapse of the SVB is still far from having said its last word.
Its most immediate effect is that banks become more cautious. They lend less easily, which is detrimental to the growth of their income and profits.
The threat of a recession
To this must be added the continuing rise in interest rates and, consequently, the increased likelihood that we will fall into a recession. What discourage many investors.
The major Canadian banks have always been very popular with savers. This is understandable: as they form an oligopoly and are very well capitalized, the risk of them going bankrupt is almost non-existent. In addition, they pay generous dividends – the average is currently 5%.
That said, banks are far from immune to recessions. When the economy shrinks, loan losses soar, credit card spending plummets, and brokerage revenue declines. It is not uncommon for bank stocks to plunge more than stock indices, as we saw during the crisis of 2008 (and last year).
This is why analyst Scott Chan of the Vancouver firm Canaccord Genuity has just reduced the target prices of the six major Canadian banks – by a proportion of 3 to 17%.
His colleague Paul Holden from CIBC is also reticent about the banks.
“Bank valuations are relatively low, but we think it’s still early days to hunt bargains,” he warns.
If you want to dive anyway, National Bank and Scotiabank, which are virtually absent from the United States, “are probably better positioned in the short term in the face of the lingering uncertainty,” says Chan.
They rarely disappoint…
We must not forget that over the long term, Canadian banks have rarely disappointed.
Over 10 years, BMO’s ZEB exchange-traded fund, which is made up of shares of the six major Canadian banks (each having the same weight), has recorded a total return (capital appreciation and dividends) of 10.5% per year. This is better than the 8.3% generated by the iShares XIU ETF, which replicates the S&P/TSX 60 index. Over five years, however, it is the latter (9.2% per year) that has had the upper hand on the ZEB (8.5%).
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