Andrew Button
·3 min read
Written by Andrew Button at The Motley Fool Canada
U.S. regional banks experienced a meltdown last week, the likes of which haven’t been seen since 2008. It all started when Silvergate, a crypto bank, collapsed, followed shortly by Silicon Valley Bank. The contagion eventually spread to more banks, leading to fears of systemic risk.
At this point, small U.S. banks are looking pretty risky. No doubt, somebody who buys the right community bank at the right time will get rich, but you’ll have to wade through a large pile of risky bets before you find such an opportunity. The risk of permanent loss of capital in the space is high.
As an alternative, you might want to consider investing in large Canadian banks. Canada’s biggest banks have never endured a single financial crisis in their entire history — a history stretching back 150 years. When you look at Canada’s banking regulations, you can see why that is the case.
Canada regulates its banks very strictly and doesn’t let many players enter the market. As a result, Canadian banks tend to be safer than U.S. banks.
In this article, I will explore two Canadian bank stocks that are relatively safe compared to their U.S. cousins.
TD Bank
Toronto-Dominion Bank (TSX:TD) is the “safest” Canadian bank going by capitalization. Today, it has a 16.2% common equity tier-one (CET1) ratio. The CET1 ratio is cash plus equity divided by all risk-weighted assets. It means that TD’s high-quality, low-risk assets are high as a percentage of total assets. In other words, the bank is not taking on an inordinate amount of risk.
This is a good thing, because “too much risk” is exactly what’s getting U.S. banks in trouble right now. The reason Silicon Valley Bank collapsed, apart from the bank run, was the fact that it was taking too much risk with its investments. It was a similar situation with the other regional banks.
Despite the fact that TD has very good risk-management practices, it has nevertheless been beaten down with the rest of the banking sector. As a result, it now trades at a mere 8.95 times earnings, 2.9 times sales, and 1.32 times book value. I’ve liked TD at much higher prices than today’s prices, so I consider it a real steal right now.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY) is Canada’s largest bank by market cap. Much like TD Bank, it’s cheap, it’s growing, and it has relatively good risk management. Royal Bank’s CET1 is not quite as high as TD Bank’s. It’s 12.1%, which is not extremely high, though is higher than what you’ll find among the failing U.S. regional banks.
Royal Bank delivered a pretty strong showing in its most recent quarter. In it, the bank delivered a 12.5% increase in revenue and a 7% increase in adjusted earnings. It was a pretty good showing. Despite all the macroeconomic issues banks are facing right now, RY managed to pull off positive growth in revenue and even earnings on an adjusted basis. This bank’s 150-year track record of financial stability speaks for itself. If you’re looking for a bank you won’t lose your shirt on, look to Royal Bank of Canada.
The post U.S. Bank Meltdown: These 2 Canadian Banks Are Safer appeared first on The Motley Fool Canada.
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Fool contributor Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
2023
I'm well-versed in banking and investment landscapes, with a focus on regulatory frameworks, risk management, and comparative analysis between different banking systems. When it comes to financial crises, the factors triggering them and the resilience of banking institutions amid turmoil, I've delved into these intricacies.
Now, about the article: it covers a critical event, a meltdown in U.S. regional banks, primarily ignited by the collapse of Silvergate, a crypto bank, followed by Silicon Valley Bank. The contagion spread, raising fears of systemic risk in the sector. The piece suggests that investing in small U.S. banks at this juncture poses high risks of capital loss.
It then presents Canadian banks as a safer alternative due to their historically sound performance, stringent regulations, and limited market entry. It features two major Canadian banks:
1. TD Bank (Toronto-Dominion Bank - TSX:TD): This bank stands out for its high Common Equity Tier-One (CET1) ratio of 16.2%, signifying a substantial proportion of high-quality, low-risk assets in its portfolio. This contrasts sharply with the risk-overburdened U.S. banks, a factor contributing to recent failures. Despite TD Bank's robust risk management, it's been unduly affected by the banking sector's downturn, presenting an attractive investment opportunity due to its undervaluation.
2. Royal Bank of Canada (TSX:RY): As Canada's largest bank by market cap, RY also exhibits favorable traits. While its CET1 ratio is slightly lower at 12.1% compared to TD Bank, it remains superior to failing U.S. regional banks. RY displayed strong performance in its recent quarter, boasting a 12.5% revenue increase and a 7% growth in adjusted earnings despite the prevailing macroeconomic challenges. Its track record of financial stability spanning 150 years reinforces its reliability as a long-term investment.
The article ultimately recommends considering these Canadian banks, emphasizing their comparatively safer profiles amidst the volatile financial climate.
In essence, the piece draws attention to the significant differences between the risk exposures of U.S. regional banks and the stability exhibited by major Canadian banks, making a case for the latter as a safer investment option in the current market landscape.
