Friday, January 18, 2008

Credit Crunch: Canadian Banks On Sale

Pictured: A different kind of crunch.

The global credit crunch seems to be affecting a lot of bank share prices, including many Canadian banks who have relatively little exposure to the sub-prime slime (CIBC excepted).

One analyst recently pointed out that 10 year Government of Canada bonds were yielding around 3.8%, and that the average weighted dividend yield of the six big banks was around 4.5%. The analyst pointed out that this was as large a spread as he could ever recall.

I too think that the banks offer tremendous value at current prices and yields. I look at it this way, if the credit crunch turns really bad, it's not just the banks that will suffer. There will really be no hiding out anywhere if things turn nasty. Having said that, I don't expect it, and therefore suggest that the current environment is great for buying banks stocks.

Of the Canadian ones, I like four of the six that have avoided most of the sub-prime problems and have dividend payout ratios around 40%.

These include the Royal Bank ($47, DivYield 4.2%, 42% Payout Ratio); my personal favourite, the Bank of Nova Scotia ($45, 4.1%, 40%); the TD ($64, 3.6%, 36%); and, to a lessor extent, the National Bank ($47, 5.3%, 39%). I think that buying a basket of these shares now, will look very good in two to five years. Odds are that the dividends will have been raised nicely over the period, and the shares are quite likely to have been repriced higher as well.

By comparison, the XIU ETF (broad Canadian market) is trading at $74 with a 2.1% dividend yield.

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1 comment:

zaphod said...

zaphod beeblebrox says: "i am right with you on this one. buy BNS today"