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Investment Strategies / Falling Knives❤
No. of Recommendations: 5
For those of you who have followed the long turnaround with Wells Fargo, TD might be a consideration. They got caught with poor internal controls and have been fined and had capital restrictions placed on them (sound familiar)? The stock of course has gotten hammered and its now trading at a fair discount to their peers.
Its trading in the mid $50s / share (USD) now ($57 as I type this); would not at all be surprised to see outperformance and a return to the upper $80s - even if the market is flattish over the next 2 years or so.
Not a bad risk/reward IMO
tecmo
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No. of Recommendations: 5
TD might be a consideration. They got caught with poor internal controls and have been fined and had capital restrictions placed on them (sound familiar)? The stock of course has gotten hammered and its now trading at a fair discount to their peers.
Its trading in the mid $50s / share (USD) now ($57 as I type this); would not at all be surprised to see outperformance and a return to the upper $80s - even if the market is flattish over the next 2 years or so.
Not a bad risk/reward IMO
Maybe so, but a major risk factor that is worth considering is that Canada's economy may be in for a world of hurt, with the Trump tariffs. Canadian real estate is among the most expensive markets in the world, despite Canada's sluggish economy, and seems due for a correction. If the tariffs throw Canada into a recession, which they may well do, then RE prices have room to drop dramatically. In that case, TD would take very heavy losses, as most of its activities are in Canada.
The other thing to consider is that their share price has actually not gotten hammered - it is actually up 3% from the C$80 it was at a year ago, which represents 17 times earnings. In US dollars, it is down about 3%, but that is just because the Canadian dollar has dropped about 6% from a year ago.
dtb
No. of Recommendations: 5
Maybe so, but a major risk factor that is worth considering is that Canada's economy may be in for a world of hurt, with the Trump tariffs. Canadian real estate is among the most expensive markets in the world, despite Canada's sluggish economy, and seems due for a correction. If the tariffs throw Canada into a recession, which they may well do, then RE prices have room to drop dramatically. In that case, TD would take very heavy losses, as most of its activities are in Canada.
The other thing to consider is that their share price has actually not gotten hammered - it is actually up 3% from the C$80 it was at a year ago, which represents 17 times earnings. In US dollars, it is down about 3%, but that is just because the Canadian dollar has dropped about 6% from a year ago.
All good points, some counter-counter arguments.
Canada Housing
* Bank Exposure seems to be fairly well managed; for example when interest rates were rising they were allowed to adjust the repayment terms for their customers.
Canada Economy
* Certainly a headwinds, could be a challenge; note that tariff threat is just a threat right now
Share Price
* Historically all the Bank stocks in Canada tend to trade in a range of each other. Royal Bank and TD being the typical leaders. In the past year RY is up 30% CIBC is up 50%, TD is flat, and dropped from $87 CAD to $73 CAD - a 15% drop. Looking even longer term
5YR
RY +65%
TD +10%
tecmo
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No. of Recommendations: 3
All good points, some counter-counter arguments.
Canada Housing
* Bank Exposure seems to be fairly well managed; for example when interest rates were rising they were allowed to adjust the repayment terms for their customers.
Canada Economy
* Certainly a headwinds, could be a challenge; note that tariff threat is just a threat right now
Share Price
* Historically all the Bank stocks in Canada tend to trade in a range of each other. Royal Bank and TD being the typical leaders. In the past year RY is up 30% CIBC is up 50%, TD is flat, and dropped from $87 CAD to $73 CAD - a 15% drop. Looking even longer term
5YR
RY +65%
TD +10%
Addressing these points in reverse order, I see 5 year returns (2020-01-01 to 2025-01-01) are all over the map for the big 6 banks (we usually talk about the big 5, but National Bank is close enough to be included I think), I get this for their returns, ignoring dividends, with TD the worst of the 6:
TD: 6%
Bank of Nova Scotia: 26%
Band of Montreal: 39%
Royal Bank: 66%
Canadian Imperial Bank of Commerce: 66%
National Bank: 85%
A lot of that TD underperformance, but not all of it, is the result of the DoJ's $3b October money-laundering ruling, with the 15% drop in share price you referred to.
Yes, tariffs are a threat, not an actual reality, but I think the chance that they happen is substantial, at least for some industries.
As for bank exposure being well managed, I have a hard time seeing how the ability of banks to extend repayment terms for its clients would do anything to protect them from substantial default rates if housing were to enter a significant correction. Canadians' mortgage rates typically renew every 5 years of less, and many mortgage holders with 5-y fixed rates are only now seeing the effect of significantly higher rates that were still less than 2% 3 years ago but which are more like 5% now. And that is without a recession and without a drop in housing prices, which would be a triple whammy that banks have not faced in decades.
TD may stilll be the best of the 6 to invest in, at the current lower price, and I suspect they will indeed rapidly correct the laundering oversight deficiencies that the DoJ found. But the whole sector I think is exposed to some substantial threats.
No. of Recommendations: 1
TD may stilll be the best of the 6 to invest in, at the current lower price, and I suspect they will indeed rapidly correct the laundering oversight deficiencies that the DoJ found. But the whole sector I think is exposed to some substantial threats.
Thanks for the thoughtful reply. Part of the thesis is that they will "catch up" with their peers and that will create an opportunity. You correctly indicated that if the entire group is shrinking it still won't make a good investment, but I am more optimistic on the CA Banking sector.
I have a hard time seeing how the ability of banks to extend repayment terms for its clients would do anything to protect them from substantial default rates if housing were to enter a significant correction. Canadians' mortgage rates typically renew every 5 years of less, and many mortgage holders with 5-y fixed rates are only now seeing the effect of significantly higher rates that were still less than 2% 3 years ago but which are more like 5% now
Extending the repayment terms allows a lot of flexibility that reduces the foreclosure risk; and really with very little downside to the mortgage holder. In addition, new policies are being introduced to extend amortizations 30 years, and allow for tax favorable saving of down payments which should create new customers for them.
The downside risk is that the housing market has been propped up by immigration, which is getting cut dramatically - but I think there is sufficient demand in the market to absorb things. Forecasting house prices is very difficult, but the banks have proven they can make nice money in really any market.
tecmo
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