Time to Buy Bank Stocks? Have I Lost My Mind?

by JDH on May 23, 2020

We’ll get back to talk of gold and bitcoin next week.  (I still like gold, by the way, and Bitcoin will be higher in a year than it is today, but it’s a speculation, not an investment).  But let’s go off the board and discuss something I have never discussed before:

Bank stocks.


The world is in lock down, everyone is deferring their loan payments, bank loan write offs will be huge; why would you buy bank stocks now?

Because they have already crashed, they have not recovered, and they still pay a good dividend.

Here’s the chart of ZEB.TO – BMO Equal Weight Banks Index ETF, and ETF.  The full fact sheet is here, but here’s the gist:

It’s an ETF that invests, in relatively equal weight, in the Big Six Canadian Bank Stocks:

  1. National Bank (the smallest of the Big Six, by far)
  2. CIBC
  3. BMO
  4. RBC
  5. TD
  6. BNS

That’s it.  They hold the stocks, and collect the dividends, and pay out the cash monthly.

The next distribution will be for Unitholders of record at the close of business on May 28th, 2020, who will receive cash distributions payable on June 2nd, 2020.  The distribution will be 10 cents, which extrapolates to $1.20 per year, and with the ETF trading around $22, the yield is just over 5%.

Not bad.

But what about the risk?

ZEB was trading at $30 on February 21, 2020, just before the crash.  It bottomed out at just over $18 on March 23, a crash of 40% in about a month.  That is a massive crash for “safe” bank stocks.  It has now recovered 13% of the 40% it dropped, so it is still near the bottom.

Could it crash more?


It was $15 in November 2011, and July 2010, so it could fall another 30% from these levels.

Will it?

I don’t think so.  It is true that bank’s will have loan losses, but that’s largely priced in.  That’s why the banks crashed 40%.  The world is re-opening.  Borrowers are going back to work, and will resume payments, so it is unrealistic to assume that banks will lose another 40% of their value from here.

Also, rough numbers, the banks pay out about 50% of their earnings in dividends.  Big Canadian Banks never cut their dividends.  So even if their income drops significantly, they could still pay out 90% of their earnings as dividends, which implies that their dividends don’t change.

So if you buy ZEB for $22, you get your 5% return.  If ZEB falls to $15, you will likely still get the same cash dividend, so provided you don’t sell, you get your 5% until it recovers.

This seems to me to be a good, relatively low risk bet.

If the market recovers, the $22 stock could be $30, so in addition to your 5% yield, there could be 36% capital appreciation.

I have taken a position; let’s watch and see what happens.