banks

Short Attack On Canadian Banks Is Overblown

Summary

  • An overview of the current short attack on the Canadian banks.
  • Why the current and potential upcoming short attack is overblown.
  • A short-term strategy for profiteering off of the swings.

In the past months, a number of foul macroeconomic items have taken a toll on Canadian banks which has created a perfect storm for short sellers. The underlying fundamental issues associated to the Canadian economy include an overall slowdown in the Canadian economy, a devastating drop in oil prices, the plunging Canadian dollar, and the possibility of a housing implosion. It is in my opinion that none of these are significant direct threats for the large 6 Canadian banks which include: Canadian Imperial Bank of Commerce (NYSE:CM), Toronto-Dominion Bank of Canada (NYSE:TD), Bank of Nova Scotia (NYSE:BNS), Bank of Montreal (NYSE:BMO), Royal Bank of Canada (NYSE:RY) and National Bank of Canada (OTCPK:NTIOF). Secondary Canadian banks focused on commercial lending include Canadian Western Bank and Laurentian Bank of Canada (OTCPK:LRCDF).

First, the Canadian banks have been heavily tied to oil prices which have obviously plunged in recent months. Sure, lower oil prices will not be good for western Canada but I fail to see the correlation between the Canadian banks and oil prices. Further, the Canadian banks are highly unlikely to finance junior oil and gas plays beyond smaller credit lines which would collectively amount to nothing, considering the debt books that the banks carry. In Canada, junior oil and gas plays are financing through public vehicles on the Toronto Stock Exchange. A review of the Toronto Stock Exchange and the Toronto Venture Exchange will show that a vast number of public companies are financed through bonds and share issuances. At what point did the chartered banks start financing the oil and gas sector? Do investors actually believe that property owners will suddenly lose their properties and that it will dramatically impact the balance sheets of the Canadian banks? Have investors lost sight into how financially stable the Canadian banks are? It is so obvious that there are few correlations between the two sectors. I simply do not see the economic ramifications of a temporary pullback in crude prices, as it is highly unlikely that crude prices will remain depressed for an extended period of time.

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CIBC

Canadian Imperial Bank Of Commerce: Next Stop $110?

Summary

The recent pullback represented a good opportunity to open or top up a position in the bank.

Company fundamentals remain strong and continue to improve.

According to analysts the stock still has room to grow.

On October 24th I recommended to buy shares in Toronto Dominion Bank of Canada (NYSE:TD) (see Buy TD Bank on Price Dips and Hold), or TD Bank, as shares in the company had been punished in parallel with the Toronto Stock Exchange. After careful examination of macro level news, it was apparent that the recent pullback was nothing more than a market correction, which in my opinion presented a buying opportunity. Since the document was published, shares in TD Bank have rebounded approximately 2.3%. In that same time frame, shares in the Canadian Imperial Bank of Commerce (NYSE:CM), or CIBC, slid to $96/share (all figures in CDN) from around $108/share and have since rebounded to current trading levels around $102/share. This represented a short term trading opportunity, or an excellent opportunity to open or increase a position in CIBC.

Most of the recent negative market news was based on activity in China and Europe so I fail to see the correlation between CIBC and the negative macro news. Of course, any significant macro news will still impact shares in all the Canadian banks, but I fail to see how the macro news would impact midterm earnings. In fact, shares in CIBC are trading at a healthy Price to Earnings ratio of around 13x and the company continues to increase dividends on the back of strong earnings. The recent dip in share price was an excellent opportunity to increase or open a position. Based on a 14x EPS, CIBC would be valued at $110/ share, which represents a healthy return for those that were able to buy shares on the recent pull back. If the stock reaches $110/share then I would consider selling my position that I acquired on the recent pullback.

Growth in Wealth Management

CIBC is primarily focused on the Canadian retail and business banking markets and has recently indicated that they will seek growth through acquisition in the wealth management arena. With the Canadian retail and business banking markets becoming hyper competitive it will be difficult for CIBC and other banks to increase profits from this market. Less notably, Credit and Saving Unions have surged forward in the past couple of years, presenting challenges to Canadian banks at a regional level. In Canada, there have been flurries of mergers and acquisitions within the Credit and Saving Union industry that don’t present a significant risk to Canadian banks, but are surely making the retail banking industry extra competitive.

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hi-canada-assorted-bankcards-852

Canadian Banks Outpace Fixed Investments

Summary

  • Review of interest rates, impact on investments, and an introduction to Canadian bank shares.
  • Saving accounts and government issued bonds are non-ideal against current inflation rates.
  • Review of several banks who offer dividend yield rates higher than current inflation rates.

As the global economy continues to show slow growth rates, central banks have moved to avoid hikes in interest rates. Low interest rates are expected to keep populations, businesses and governments spending new capital, while an increase in interest rates could deter new consumer spending and business cap expenditure spending. From a high level this represents the current situation in America and other industrialized nations. It is in my opinion that the current period of prolonged low interest rates is far from over and could easily carry on to the end of the decade. The current period of prolonged low interest rates bring the possibility of increased inflation which can greatly impact the value of cash. Canadian banks have traditionally been viewed as income-generating investments paying handsome dividends while growing profits have recently seen an increase in appetite for their stocks which is partially related to low interest rates.

As retail investors lack alternative investment opportunities that allow them to beat inflation, they have turned high yielding dividend shares as an option. As a flood of new investment has poured into the banking sector, shares prices have rallied which has in turn decreased dividend yields but increased capital appreciation. In parallel with this market activity the banking industry has moved to continuously increase dividends to keep dividend yields at an attractive rate. Today, Canadian banks are paying dividends which yield between 3.5-4.5% depending on the risk associated with the investment and time of entry. For example, an ideal time to open or build a position in an income-generating stock is during a market correction as yields offered can significantly improve.

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rbc-scotia-cibc

Economic trends and current situations:

Canadian Banks Outpace Fixed Investments

Summary

  • Review of interest rates, impact on investments, and an introduction to Canadian bank shares.
  • Saving accounts and government issued bonds are non-ideal against current inflation rates.
  • Review of several banks who offer dividend yield rates higher than current inflation rates.

As the global economy continues to show slow growth rates, central banks have moved to avoid hikes in interest rates. Low interest rates are expected to keep populations, businesses and governments spending new capital, while an increase in interest rates could deter new consumer spending and business cap expenditure spending. From a high level this represents the current situation in America and other industrialized nations. It is in my opinion that the current period of prolonged low interest rates is far from over and could easily carry on to the end of the decade. The current period of prolonged low interest rates bring the possibility of increased inflation which can greatly impact the value of cash. Canadian banks have traditionally been viewed as income-generating investments paying handsome dividends while growing profits have recently seen an increase in appetite for their stocks which is partially related to low interest rates.

As retail investors lack alternative investment opportunities that allow them to beat inflation, they have turned high yielding dividend shares as an option. As a flood of new investment has poured into the banking sector, shares prices have rallied which has in turn decreased dividend yields but increased capital appreciation. In parallel with this market activity the banking industry has moved to continuously increase dividends to keep dividend yields at an attractive rate. Today, Canadian banks are paying dividends which yield between 3.5-4.5% depending on the risk associated with the investment and time of entry. For example, an ideal time to open or build a position in an income-generating stock is during a market correction as yields offered can significantly improve.

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