Given that the world is in lock down, unemployment is high, borrowers were granted up to six months in interest deferrals due to the pandemic, and businesses are going out of business, how do you think bank stocks are doing?
Very well, it turns out.
How is that possible?
Government stimulus, I assume, in many arrears.
First, with interest rates at historic lows, the real estate market, with the exception of condos in downtown Toronto, has held up remarkably well. Banks lend against real estate, so if real estate is doing well, banks are doing well.
Second, the banks granted deferrals, so if borrowers don’t have to make payments, they won’t, but those loans are therefore not in default, so the banks do not have to increase their loan loss provisions, so profits look good.
Finally, government stimulus: payments to individuals, like CERB, have allowed consumers, in combination with deferral periods, to continue to service their debt, and payments to companies, like the Wage Subsidy, have allowed corporations to service their debt, all of which is good for the banks.
In fact, some government stimulus, like the Canada Emergency Business Account, are government guaranteed loans administered by the banks, so the banks can earn a risk free return granting these loans.
Which leads us to my most bizarre successful investment: ZEB.TO – BMO S&P/TSX Equal Weight Banks Index ETF
ZEB is an ETF that invests a roughly equal weight in the “Big Six” Canadian bank stocks:
| Name |
Symbol |
% Assets |
| National Bank of Canada |
NA.TO |
18.49% |
| Canadian Imperial Bank of Commerce |
CM.TO |
17.64% |
| Bank of Montreal |
BMO.TO |
16.63% |
| Royal Bank of Canada |
RY.TO |
16.43% |
| The Toronto-Dominion Bank |
TD.TO |
15.58% |
| Bank of Nova Scotia |
BNS.TO |
14.93% |
I first reported on ZEB back on May 23: Time to Buy Bank Stocks? Have I Lost My Mind? where I announced that I had taken a position in ZEB.
Turns out that was an excellent speculation. My average cost is just over $22, and ZEB closed at exactly $29 on Friday. Not bad. Even better, I’m earning a dividend of just under 5%, because ZEB is a basket of bank stocks, and bank stocks pay dividends.
I prefer to speculate in gold stocks, and high risk speculations like bitcoin (on a very limited scale), but it’s also prudent to have some lower risk investments in the portfolio, and for that, ZEB has performed spectacularly well.
What’s next?
The Relative Strength Index is at 74, which is very high and very overbought, so a correction would not be surprising at these levels. But what would cause the correction? If we get a vaccine and the economy improves, the banks will do better, not worse. If the government stops stimulating that will hurt the banks, but there is no sign of that happening, yet.
So, for now, I hold, and accept the dividend payment each month.
No point fighting what’s working.
That’s the update, more next week.
My Most Bizarre Successful Investment: Canadian Bank Stocks
by JDH on December 5, 2020
Given that the world is in lock down, unemployment is high, borrowers were granted up to six months in interest deferrals due to the pandemic, and businesses are going out of business, how do you think bank stocks are doing?
Very well, it turns out.
How is that possible?
Government stimulus, I assume, in many arrears.
First, with interest rates at historic lows, the real estate market, with the exception of condos in downtown Toronto, has held up remarkably well. Banks lend against real estate, so if real estate is doing well, banks are doing well.
Second, the banks granted deferrals, so if borrowers don’t have to make payments, they won’t, but those loans are therefore not in default, so the banks do not have to increase their loan loss provisions, so profits look good.
Finally, government stimulus: payments to individuals, like CERB, have allowed consumers, in combination with deferral periods, to continue to service their debt, and payments to companies, like the Wage Subsidy, have allowed corporations to service their debt, all of which is good for the banks.
In fact, some government stimulus, like the Canada Emergency Business Account, are government guaranteed loans administered by the banks, so the banks can earn a risk free return granting these loans.
Which leads us to my most bizarre successful investment: ZEB.TO – BMO S&P/TSX Equal Weight Banks Index ETF
ZEB is an ETF that invests a roughly equal weight in the “Big Six” Canadian bank stocks:
I first reported on ZEB back on May 23: Time to Buy Bank Stocks? Have I Lost My Mind? where I announced that I had taken a position in ZEB.
Turns out that was an excellent speculation. My average cost is just over $22, and ZEB closed at exactly $29 on Friday. Not bad. Even better, I’m earning a dividend of just under 5%, because ZEB is a basket of bank stocks, and bank stocks pay dividends.
I prefer to speculate in gold stocks, and high risk speculations like bitcoin (on a very limited scale), but it’s also prudent to have some lower risk investments in the portfolio, and for that, ZEB has performed spectacularly well.
What’s next?
The Relative Strength Index is at 74, which is very high and very overbought, so a correction would not be surprising at these levels. But what would cause the correction? If we get a vaccine and the economy improves, the banks will do better, not worse. If the government stops stimulating that will hurt the banks, but there is no sign of that happening, yet.
So, for now, I hold, and accept the dividend payment each month.
No point fighting what’s working.
That’s the update, more next week.