Investing

Why are bank stocks not recovering as economy begins to reopen?

  • Last Updated:
  • May 28th, 2020 11:53 am
[OP]
Newbie
Oct 18, 2009
57 posts
8 upvotes
North York

Why are bank stocks not recovering as economy begins to reopen?

Bank stocks dropped just as much as every other industry during the coronavirus crash.
However as other stocks are recovering quickly to their pre crash values, bank stocks seem to have kind of levelled off close to the bottom and aren't recovering yet.

Does anyone know why?
79 replies
Deal Addict
Nov 9, 2013
3652 posts
3170 upvotes
Edmonton, AB
erotavlas wrote: Bank stocks dropped just as much as every other industry during the coronavirus crash.
However as other stocks are recovering quickly to their pre crash values, bank stocks seem to have kind of levelled off close to the bottom and aren't recovering yet.

Does anyone know why?
There's the giant macro headwind of falling interest rates. In Canada, there's ongoing concerns re consumer indebtedness as well and exposure to small businesses who are going to be very negatively impacted by the corona crisis.

Also, there's been a general negative sentiment to the banks (due to housing market concerns in Canada) over the last 3-4 years, and I think this sentiment is getting worse with time.
Last edited by treva84 on May 12th, 2020 1:13 pm, edited 1 time in total.
Keep calm and go long
Deal Fanatic
Feb 4, 2015
5540 posts
2132 upvotes
Canada, Eh!!
There will be lag in bank stocks performance vs economy reopening.

As suggested above the lower prices are a great opportunity imho to buy a basket of bank stocks.

Suggest buy both US and CAN banks. Buy 1/4 or similar position at a time especially for US banks. The recent performance of JPM, BAC, etc. suggests more downside before tick higher.
Deal Addict
Dec 3, 2014
1594 posts
653 upvotes
Ontario
The banks tend to trade inline with the economy. Simply opening things up does not mean that we are back to January 2020 and we can just continue on the bull run. The market overall only looks half decent because tech put the rest of the market on its back and dragged it up to current level.
Sr. Member
Nov 16, 2012
636 posts
177 upvotes
VANCOUVER
I'd assume we haven't seen the worst yet either from the banks - what happens when the deferral period ends and people default or can't pay things back?
Deal Addict
Jul 12, 2008
2076 posts
429 upvotes
Burlington
Insurance companies are very cheap as well with juicy dividends. I was reading a story that if banks are made to do another 6 month deferral which CMHC has already approved, some of the smaller banks might not make it.

People will likely sell their house or other assets if they can't make their payments so I am not sure why the price is still very cheap relative to something like Bell. Its high unlikely the government will allow a wave of bankruptcies as it doesn't benefit anyone.
Deal Addict
Jul 23, 2007
3995 posts
1923 upvotes
Hard to believe that since the rout began in late February, I've only added to one bank and that was in early April. The five Canadian bank majors are still on my target list for the long term.
Deal Addict
User avatar
Aug 21, 2008
3882 posts
648 upvotes
West Side GTA
The way I've been approaching it is simply dollar cost averaging...I'm terrible at timing the market so I don't even try. With the big five I recognize they are low right now and I've just been nibbling away at some every other week. Remember your time horizon as everyone is different
Deal Fanatic
Oct 7, 2007
6703 posts
2994 upvotes
Markets are perfect (as described in my strategic management course) and the market is smart. The value of the bank stocks is a direct reflection of how they are valued by the market.

As someone who doesn't hold any stocks I would be curious to know if banks in Canada continue to pay generous dividends?
Deal Addict
Oct 21, 2014
1400 posts
1693 upvotes
Burlington, ON
choclover wrote: Markets are perfect (as described in my strategic management course) and the market is smart. The value of the bank stocks is a direct reflection of how they are valued by the market.

As someone who doesn't hold any stocks I would be curious to know if banks in Canada continue to pay generous dividends?
Markets are very much not perfect, they're subject to the same biases, manias and depressions as their participants. They even behave like people: scared easily and slow to rebuild confidence. They're nothing more that an extension of our collective ego, controlled by our fear and greed, hence why we get bubbles and bear markets. Think of it this way, Markets are forward looking machines, but the future is unknowable, so all conclusions drawn can only be tested against a past that is not reflective of the future. So how could any conclusion drawn be relevant?Smiling Face With Open Mouth

Anyway, in this case I continue to believe the action in the banks is a reflection of a fundamental misunderstanding of their business model. I guess we will see when they report at the end of the month.

Yes, the major banks will continue to pay dividends.
Newbie
Sep 6, 2018
70 posts
49 upvotes
Gungnir wrote: Markets are very much not perfect, they're subject to the same biases, manias and depressions as their participants. They even behave like people: scared easily and slow to rebuild confidence. They're nothing more that an extension of our collective ego, controlled by our fear and greed, hence why we get bubbles and bear markets. Think of it this way, Markets are forward looking machines, but the future is unknowable, so all conclusions drawn can only be tested against a past that is not reflective of the future. So how could any conclusion drawn be relevant?Smiling Face With Open Mouth

Anyway, in this case I continue to believe the action in the banks is a reflection of a fundamental misunderstanding of their business model. I guess we will see when they report at the end of the month.

Yes, the major banks will continue to pay dividends.
Are you insinuating that institutional investors don't understand how banks operate? Also, what metrics are you using to determine the sustainability of their current dividend?
Deal Addict
Nov 4, 2007
1429 posts
513 upvotes
Toronto
Small business bankruptcy is still yet to be completely unveiled.
People with no emergency funds may default on mortgage payments in the next couple months before the economy and jobs recover.
Housing bubble may burst as well.
People not spending - Cash is king, so credit card debt is declining. Credit card balances are a huge profit center for banks.

Keep bank stocks for dividends, but don't expect any capital appreciation any time soon.
Deal Addict
Oct 21, 2014
1400 posts
1693 upvotes
Burlington, ON
jaysdt wrote: Are you insinuating that institutional investors don't understand how banks operate? Also, what metrics are you using to determine the sustainability of their current dividend?
I'm saying that the markets are highly emotional, and sometimes people forget that. As to your question, I believe that the market in general is pricing in a scenario which is not tethered to what I believe the long term losses in regards to the banks will be. It's hard to say what the big institutions believe or don't because they write to try to change your behavior in to something that would benefit their current positions. They are not in the business of informing you.

For example they've been calling for a housing crash in Canada every year since the early 2000s which didn't materialize. You can read about the great Canadian housing crash of 2013 here: Macleans article. If you were to follow, you should sell your house and wait for the crash in 2013.

Seems like a wrong move, doesn't it? What if you had undertaken such an action? You'd be renter is what would have happened.

We'll have to see as they start reporting at the end of the month. As for the sustainability of the dividend, TD and CIBC for example have already stated their intention to keep the dividend. Believe them or not, but I will stick with it.

Top