It’s important to always remember, we live in Canada. While Canadians and our economy certainly are affected by the movements of our neighbours to the South, the United States is its own entire country. One that prides itself on competition. And that’s become incredibly important ahead of a potential recession for Canadian bank stocks.
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What’s the difference?
Here in Canada, there is an oligopoly of six major banks. There simply isn’t the same competition and hyper-focus on industries in America, where banks pop up and down time and again. Yet while competition can be a good thing, right now it’s proving to fuel the fear-filled fire for American investors, and thus Canadian investors as well.
When a small bank focusing on Silicon Valley goes under, this does not mean the entire country is going under as well. Likewise, when a Canadian bank provides less-than-stellar earnings, it does not mean that Canada is doomed to failure, along with all Big Six Banks.
Remember back to the Great Recession if you don’t believe me. Granted, the Big Six Banks crashed and burned during that time, yet came back from the ashes. Within a year, the banks rebounded to pre-fall prices after hitting 52-week lows.
So while I would recommend one bank over another here, I am not suggesting you suddenly sell off everything you have in these banks. Long-term holds are always the best strategy, especially in Canadian banks.
1 Bank to Avoid
Toronto Dominion Bank (TSX:TD) recently saw shares climb slightly on May 4 after the company announced it would no longer go through with the US$13.4 billion purchase of First Horizons in the southern states.
This is definitely good news for the company, putting cash in its pockets during a time of incredible turmoil. And TD stock may need it, as the bank already has a large presence in the United States. Again, the U.S. has so much competition, so TD stock certainly has a lot of work to do to keep its spot in the top 10 American banks.
While this is good news in the short term, allowing cash reserves for loan losses, longer term this may not be so great. TD stock wants to continue U.S. expansion and could have received an incredible deal at this point. However, regulatory roadblocks got in the way, according to both banks. So it’s likely TD stock may continue expansion in the future, only to pay a higher price.
So while TD stock is certainly still a great long-term hold, those hoping for superior growth in the near future will have to wait a while yet.
1 Bank to Buy
If you’re worried about a potential recession and want a bank for protection, I would instead recommend The Bank of Nova Scotia (TSX:BNS). There’s one main reason, it’s out of the United States. Instead, Scotiabank stock focuses on emerging markets, specifically in Latin America.
What’s more, this is where the bank stock continues to expand. In the near future, it’s looking for hyper growth, specifically in Mexico. This is already where there are major alliances between Canada and Mexico, and the company is hoping to further those. Then, this could lead to more expansion southward.
So if you’re looking for growth, Scotiabank looks like it may offer that to investors. Plus, with less exposure to the movements in the U.S., there isn’t that fear fuelling your decision. Scotiabank stock trades at 9 times earnings as well, providing a great deal, and holds a 6.25% dividend yield as of writing.
Again, this isn’t to say you should stay away from TD stock forever. The Canadian banks continue to be solid options for shareholders holding long term. But if you’re wanting near-term protection, I would recommend Scotiabank stock instead.
