Investing

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

  • Last Updated:
  • May 28th, 2020 11:53 am
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Newbie
Oct 18, 2009
60 posts
9 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?
78 replies
Deal Addict
Nov 9, 2013
4377 posts
4483 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
7538 posts
3656 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.
July 13, 2017 to October 25, 2018: BOC raised rates 5 times and MCAP raised its prime rate next day each time.

2020: BOC dropped rates 3 times and MCAP waited and waited to drop its prime rate to include all 3 drops.
Deal Addict
Dec 3, 2014
2348 posts
1834 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
659 posts
180 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
4022 posts
1192 upvotes
GTA
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
4614 posts
3391 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
4302 posts
1139 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
8964 posts
4808 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
1615 posts
2105 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
87 posts
60 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
1638 posts
846 upvotes
GTA
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
1615 posts
2105 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.
Deal Addict
User avatar
Mar 10, 2018
4425 posts
1122 upvotes
does it matter?
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?
Good job noob. If anyone knew the answer to that they would be billionaires. Just look at warren buffett stocks
Tried new coffee and doughnut. Found same old stale thing. expected bill of six bucks but it was 600 million. Big mistake so the guy said don't worry it is on the house. going back to McD.
Newbie
Sep 6, 2018
87 posts
60 upvotes
Gungnir wrote: 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.
or maybe they're pricing in a scenario with revenue/earnings deterioration and are currently overvalued? You have to ask yourself why are institutional investors not jumping in at these levels if they're a great buy, instead these same investors are all jumping to AMZN/MSFT etc.., which are at all time highs. in addition, banks operate in separate divisions, so the bank could issue a buy rating on TSLA, but the fund manager can make his own decisions and can short TSLA.
Gungnir wrote: 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.
RE and stocks are completely different. People need a home to live in whereas people generally do not have a dependency on a particular stock.

There is a difference between intention and ability. In order to better assess whether the bank can maintain dividends, you need model out free cash or earnings on a stress case basis to see if they have enough liquidity to pay out dividend obligations.
Deal Addict
Oct 21, 2014
1615 posts
2105 upvotes
Burlington, ON
jaysdt wrote: or maybe they're pricing in a scenario with revenue/earnings deterioration and are currently overvalued? You have to ask yourself why are institutional investors not jumping in at these levels if they're a great buy, instead these same investors are all jumping to AMZN/MSFT etc.., which are at all time highs. in addition, banks operate in separate divisions, so the bank could issue a buy rating on TSLA, but the fund manager can make his own decisions and can short TSLA.



RE and stocks are completely different. People need a home to live in whereas people generally do not have a dependency on a particular stock.

There is a difference between intention and ability. In order to better access whether the bank can maintain dividends, you need model out free cash or earnings on a stress case basis to see if they have enough liquidity to pay out dividend obligations.
Neither of us know their positions. I do see a large buildup of short positions on the Canadian banks, but I've seen that before as well as recently as December 2018. Anecdotally, one poster on RFD made posts that if followed, he lost over a million dollars shorting the banks since 2015, (I don't believe what he wrote, but whatever).

RE and stocks are different, but it's a report put out by an institution, if I had followed at the time I'd have lost hundreds of thousands of dollars of appreciation in my residence. The banks are very tied to real estate, so the read-through is there. They were wrong, and lucky for their investors they didn't have any skin in that game. Sometimes you choose your institution well, other times you choose an outfit like optionsellers.com and lose everything. Get what I mean?

I'm only using this exaggerated example to illustrate the point that institutions are very fallible. They write things like this, they blow up accounts and we only hear of the survivors and thus we think they have portent to read the future. As for why institutions (active money) aren't jumping at getting more bank stock, they aren't a monolithic group. Some are, and some aren't.

As to ability, TD has already said that they will be continuing to pay the dividend. To be clear, I know they will be negatively impacted by COVID but to what extent I do not know, I can't really certify what the CEO has said.

My largest holding is RY, and in Q1 they had $3.5 billion worth of profit, have about a 49% payout ratio and have the largest CET1 reserves of any Canadian bank. I believe that this dividend is safe, and the months ahead will show us.
Newbie
Sep 6, 2018
87 posts
60 upvotes
Gungnir wrote: Neither of us know their positions. I do see a large buildup of short positions on the Canadian banks, but I've seen that before as well as recently as December 2018. Anecdotally, one poster on RFD made posts that if followed, he lost over a million dollars shorting the banks since 2015, (I don't believe what he wrote, but whatever).

RE and stocks are different, but it's a report put out by an institution, if I had followed at the time I'd have lost hundreds of thousands of dollars of appreciation in my residence. The banks are very tied to real estate, so the read-through is there. They were wrong, and lucky for their investors they didn't have any skin in that game. Sometimes you choose your institution well, other times you choose an outfit like optionsellers.com and lose everything. Get what I mean?

I'm only using this exaggerated example to illustrate the point that institutions are very fallible. They write things like this, they blow up accounts and we only hear of the survivors and thus we think they have portent to read the future. As for why institutions (active money) aren't jumping at getting more bank stock, they aren't a monolithic group. Some are, and some aren't.

As to ability, TD has already said that they will be continuing to pay the dividend. To be clear, I know they will be negatively impacted by COVID but to what extent I do not know, I can't really certify what the CEO has said.

My largest holding is RY, and in Q1 they had $3.5 billion worth of profit, have about a 49% payout ratio and have the largest CET1 reserves of any Canadian bank. I believe that this dividend is safe, and the months ahead will show us.
yes, there will be a segment of people who will make the right decisions, but please don't compare a random RFD poster to someone that has their PHD/ivey undergrad. in addition, looking at trailing earnings tells you nothing about what's happening now or the future. anyways i'm not here to dissuade you; i initially asked to see if you had a cogent investment thesis instead of a cursory glance at the company. to be clear i'm neutral on banks and neither bullish/bearish, but see them having a hard time beating the index (take a look at the breakdown of total return if you haven't). take it for what it's worth - this is what i do for a living and my US institutional trade desk contact just emailed me this "Tech still holding on pretty well all things considered but Financials and Energy action is gross as the losers keep losing. Look at Fins /Energy. Bottom today, bottom YTD and furthest away from their 200 day moving averages ". keep in mind that this was his day to day commentary - hope this helped and have a nice day.
Deal Fanatic
Dec 20, 2018
5930 posts
4976 upvotes
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?
Exactly...sell banks and buy Shopify!

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