The Canadian bank stocks have finally caught a break, with shares of top banks sailing modestly higher on the back of broader stock market strength. Indeed, it’s tough to tell what comes next for Canada’s Big Six banking giants. On the one hand, there’s an economic downturn that threatens to take another modest bite out of earnings.
Undoubtedly, loan growth can stall out when economic headwinds begin to mount. After a dreadful 2022 (and start to 2023) for many banks in Canada and the U.S., I think many investors may be baking in too much of the downturn-related headwinds to come. Arguably, mild macro headwinds and fear of their worsening have already dragged bank stocks into oversold conditions.
Just as there’s a market correction (defined as a 10% pullback from a high), there can be an upside correction. And I think some of Canada’s top banks are overdue for one, with such an ugly selloff that now appears to be moving further into the rear-view mirror.
The Canadian bank stocks may have bottomed out finally! But there’s still a recession looming
Now, it’s tough to catch a bottom in any stock, let alone a bank that tends to be pretty sensitive to the state of the economy at any given moment. At this juncture, the bank stocks seem to be slowly but steadily inching higher. The dust seems to have settled, and the U.S. regional bank fears that plagued the share prices of numerous Canadian banks now seem to be fading away. Indeed, the regional bank woes kicked many top Canadian bank stocks when they were already down.
Nowadays, bank stocks seem less horrifying to buy. We’re probably not going to learn of a new regional bank experiencing some sort of run on the daily. The talk of the town is about tech and the rise of AI — and about the potential indirect beneficiaries of the trend. Pessimism and fear have been switched out with hope and hype. And the banks, I believe, could be next in line for a sizeable move higher.
Sure, if you’re a buyer here, you missed the bottom in various Big Six bank stocks. However, there’s still value (and yield) to be had. I am more bullish on the bank prospects, even though we’re technically closer to moving into a recession. The market already appears to be looking through a recession to come. And that bodes well for the banks, which tend to boom when sights are set on a post-recession world.
TD Bank looks like a Canadian bank stock worth buying right now
TD Bank (TSX:TD) stock stands out as my favourite Canadian bank stock to consider buying this August. Why? Shares are still down just shy of 20% from their 2022 all-time highs, with a modest multiple. But most importantly, I like the U.S. retail banking exposure and the margin tailwinds that could help give the firm a nice jolt, as interest rates stay somewhat elevated.
Indeed, high rates can be good or bad news for the financials. But provided they don’t spark a crisis or steep recession, they are a good thing. As the market looks to a 2024 recovery, I couldn’t be more bullish on the banks, especially retail-heavy banks with some business south of the border.
The stock trades at 10.9 times trailing price to earnings, with a 4.44% dividend yield.
