The high interest rate environment should technically allow Canadian banks to generate higher revenue through lending credit. However, the recessionary environment is making it challenging for Canadian investors to put their money to work in the stock market. If you are worried about the next few weeks for the banking sector, investing in Canadian bank stocks might be difficult.
However, there are a few Canadian bank stocks with solid fundamentals and the ability to sustain themselves in recessionary environments. If you must choose one, I will discuss two bank stocks you can consider for your self-directed portfolio.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is a $79.25 billion market capitalization multinational Canadian banking and financial services company. Headquartered in Toronto, it boasts the third-largest market capitalization among its peers in the Big Six Canadian banks. It is also one of the oldest dividend-paying Canadian stocks with a 190-year streak.
While the other big banks also have international operations, Scotiabank stands out among them for its diversification. Its focus on the Pacific Alliance countries of Columbia, Chile, Mexico, and Peru is a double-edged sword. Its operations in these growing markets present strong long-term growth potential. However, these economies are riskier to operate in due to political instability.
As of this writing, Scotiabank stock trades for $66.50 per share, boasting a juicy 6.20% dividend yield. It might be an attractive asset to consider due to its low exposure to U.S. banking operations and high-yielding dividend payouts.
Toronto-Dominion Bank
Toronto-Dominion Bank (TSX:TD) is a $144.17 billion market capitalization stock headquartered in Toronto. The multinational banking and financial services company has significant U.S. retail and wholesale banking operations. It also has a 13% ownership stake in Charles Schwab bank.
The ongoing issues with U.S. banks might worry Canadian investors about TD Bank stock. However, TD Bank stock can be considered a relatively safer investment than its peers.
It boasts a common equity tier-one (CET1) ratio of 16.2%, which is lower only than the 16.7% CET1 ratio for Bank of Montreal. Comparatively, Scotiabank has an 11.5% CET1 ratio. CET1 ratio is the most popular risk measure among Canadian bank stocks.
The higher it is, the safer an investment it can be considered. Besides its healthy CET1 ratio, TD Bank boasts enough liquidity to cover 46% of its deposits. Theoretically, it can survive a massive surge in withdrawals.
As of this writing, TD Bank stock trades for $79.14 per share and boasts a 4.85% dividend yield. While it boasts a lower dividend yield, it seems to be the safer investment of the two on paper.
Foolish takeaway
Despite the current uncertainty in the macroeconomic environment, Scotiabank and TD Bank continue to deliver good performances. With a reliable reputation for distributing shareholder dividends and solid future plans, both appear well positioned to secure substantial long-term growth. If you have to choose between the two, you cannot go wrong with either bank stock.
