Bank Stocks: I’m Buying the Panic-Driven Dip

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Written by Andrew Button at The Motley Fool Canada

The past month has witnessed a true panic in banking stocks. It all got started when Silvergate Bank, a bank catering to the cryptocurrency industry, failed. Shortly afterward, Silicon Valley Bank and Signature Bank failed, while Credit Suisse was saved at the last minute by a buyout from another Swiss bank UBS.

As you can imagine, a lot of bank shareholders are feeling nervous right now. With these failures spreading from one bank to the next, there is significant fear of a “contagion” like the one that brought down several large banks in 2008.

Fortunately, the situation isn’t so dire this time. The collapsing small/mid-sized banks are providing a flow of new deposits to big banks, which are becoming more robust than ever. Nevertheless, the big banks are falling right along with their beleaguered mid-sized cousins. It looks like there’s a valuation discrepancy here. In this article, I will explore the bank stocks I’m buying to take advantage of this ongoing dip.

What I’ve been buying

The main bank stocks I have been buying during this panic driven dip are Toronto-Dominion Bank (TSX:TD) and Bank of America (NYSE:BAC). I also made a small purchase of shares in MSCI China Financials ETF — a fund of Chinese bank and insurance stocks.

Why do I like these particular bank investments?

Well, for one thing, TD and BAC are both big banks — the type that is gaining deposits at the expense of the smaller ones. For another thing, none of the bank investments I have bought are at risk of liquidity issues. The banks mentioned above have liquid assets near 50% of their deposit base. So, it would take a truly colossal bank run to bring them down.

TD Bank currently has 46% of the liquid assets that would be needed to pay off all of its depositors. It also has a large $1 trillion loan portfolio that brings in some cash flow each year. The bank’s own loans can’t just be “sold” quickly, but they do provide some regular cash that would help with paying depositors if needed. So, it’s in a relatively good place.

Bank of America has 50.5% of the cash and liquid securities needed to pay off its depositors. Here I’m just talking about the cash and bonds that BAC owns. I’m not counting securities held in its investment banking division, or being held under repurchase agreements. So, Bank of America has enough securities that it’s free to do what it wants with to pay for more than half of its deposits.

One risk to watch out for?

As I showed above, there are many banks whose balance sheets show low risk levels, even in this uncertain environment. They could be good dip buys. Nevertheless, investors will want to watch out for central banks hiking interest rates even further. If they do so, it will cause the fair value of the banks’ assets to decline. That will make it increasingly harder for the banks to meet their liquidity needs. So, it’s a real risk to the banking sector at the moment.

The post Bank Stocks: I’m Buying the Panic-Driven Dip appeared first on The Motley Fool Canada.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Fool contributor Andrew Button has positions in Toronto-Dominion Bank, Bank of America and MSCI China Financials ETF. The Motley Fool recommends Bank of America. The Motley Fool has a disclosure policy.