The Canadian bank scene has undergone a heck of a lot of volatility in recent years. While many Canadians may have given up on the group amid their lacklustre performances of late, I’d argue that value hunters should be more than willing to give the batch (known as the Big Six banks) the benefit of the doubt. The group is trading at a nice discount relative to historical averages, with dividend yields that are very generous at current levels.
Of course, there are headwinds that will persist through 2024, and that could weigh heavily on earnings growth prospects. A recession could bring forth more provisions, and the big bank stocks may prove pricer than they look on the surface. In any case, I think it’s wrong to view the group as a value trap.
Expectations are already quite muted for coming quarters, after all. And though the big bank stocks could really use some sort of catalyst to propel them back to all-time highs, I’d argue that lower rates may help the bank stocks kick off a rally well ahead of a potential Canadian economic recession.
Lower rates could take pressure off all parts of the economy, which should benefit the big banks, even if lower rates entail slightly lower net interest margins (NIMs). At the end of the day, I’ve referred to interest rates as a double-edged sword for the banks. I think we’ve reached a point where lower rates could be a potential boon for bank stocks as they sail through what remains of industry headwinds.
In this piece, we’ll check out two great bank stocks with swollen dividend yields Scotiabank (TSX:BNS) and CIBC (TSX:CM).
Scotiabank
Scotiabank is a relatively unloved bank stock, with a massive 6.88% dividend yield at the time of writing. At $61 and change per share, the stock is just north of 26% from its 2022 all-time highs. After another sluggish year, BNS stock has a lot to prove going into 2024. If the bank can stay resilient in the face of what remains of macro headwinds, I’d argue shares may be able to face more upside than peers. Indeed, Scotiabank’s international exposure can work in its favour once the world economy is able to conquer inflation and get back on the growth track.
At 10.7 times trailing price to earnings (P/E), I continue to stand by BNS stock as one of the cheapest ways to gain exposure to the Canadian banking scene. Just be aware of the elevated risks versus peers as Canada faces potential recessionary roadblocks.
CIBC
If you’re hungry for yield, CIBC stock is another great pick in the banking scene going into mid-2024. If Scotiabank is the internationally focused Canadian bank, CIBC has to be the mortgage-heavy one. Indeed, higher rates have added a bit of pressure on the backs of those holding hefty mortgages. Don’t expect a repeat of what happened in the U.S. back in 2008, though.
Rates are coming down, and CIBC stands to gain as Canada’s economy comes out of 2024 with lower rates and perhaps new highs on the TSX Index. With a 5.86% dividend yield, CM stock is a great value play for any new income investor!
Between CM and BNS stock, I’d go with the latter for the higher dividend yield and upside potential in an economic rebound scenario.
