Big Banks Drop: Why Now is the Time to Buy
Written by Amy Legate-Wolfe at The Motley Fool Canada
American banks plummeted over the last week after the closure of SVB Financial Group, that came right on the heels of Silvergate. SVB was the go-to bank for tech startups in Silicon Valley, whereas Silvergate focused on cryptocurrency. Both are industries that have dropped heavily in the last year.
Not surprisingly, the closure of these banks led to a major drop in American bank shares across the board. The contagion then moved across the border to Canada, where the Big Six Banks all felt the sting.
Yet in my view, now is the time to buy. That is, if you’re a long-term holder looking for a deal. It doesn’t get much better than this, and you’re sure to see a rise, especially for these two bank stocks.
Royal Bank stock
Royal Bank of Canada (TSX:RY) wasn’t immune to the recent drop in bank stocks, even though it’s the largest of the Big Six Banks. With a market capitalization $182.5 billion, RBC stock has long claimed the top spot.
Yet this didn’t protect it from movements across the border. RBC stock is down 5.4% in the last month, falling 4% alone in the last few days, at the time of writing. However, in the last year alone, it’s only down by 1%. So what gives?
RBC stock remains at the top because it is prepared. This is true in a number of ways. The bank has provisions for loan losses to protect it from these drops. It has exposure to a diverse set of investments, including emerging markets and wealth and commercial management. All of this has created a lucrative business environment that will keep it afloat.
So afloat, in fact, that during downturns it takes about a year for the bank to return to pre-fall prices. After dropping 46% from peak to trough during the Great Recession, shares rebounded by July 2009. So, I would certainly take this time to look at the bank stocks and consider RBC stock for this reason. As well as its 3.9% dividend yield while it trades at 12.7 times earnings.
RBC stock may be the largest by market cap, but Toronto Dominion Bank (TSX:TD) is a close second at $148.9 billion. Yet, the situation has been dramatically different compared to that of RBC stock, with shares down almost 13% in the last month alone.
The reason for this might be the choice that TD stock made when it comes to its own diversification. While it’s one of the bank stocks that has certainly entered the wealth and commercial management sector, it’s not as groomed as RBC stock.
Further, loan repayments are strong, and it offers a multitude of loan repayment options depending on your financial needs. This is great, of course, but it’s not going to exactly bring in an enormous amount of revenue compared to that of RBC. Even still, it’s certainly an improvement compared to the other bank stocks.
Then, there’s its exposure to the United States, as one of the top 10 banks in the country. While this might seem like a bad thing given the downturn, I’d argue it’s not. America tends to recover quickly, so exposure to Canada and the U.S. could be very good for TD stock.
Meanwhile, you can look to the past for how shares may perform. TD stock dropped about 50% from peak to trough during the Great Recession over almost a year. By September, it had recovered and climbed from there. Shares are now down 13.7% in the last year, dropping almost that much in a month. But again, it’s one of the bank stocks I’d hold while trading at 10.1 times earnings, and with a 4.48% dividend yield to boot.
The post Big Banks Drop: Why Now is the Time to Buy appeared first on The Motley Fool Canada.
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Fool contributor Amy Legate-Wolfe has positions in 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.