I am no different than anybody; I’m always trying to find a way to make a few bucks out of the market. Since the past 4 months, Canadian Bank Stocks have been decreasing tremendously. In fact, most of them lost about 40% of their value. Since the Canadian Bank System has been voted to be the most stable and secured in 2008 by the IMF (International Money Fund), I thought it would be a great idea to give this industry a look.
Here’s the plan:
Interest rates are pretty low (it may get even lower due to the historic announcement by the FED last week!). So I have the possibility of borrowing at 1.5% (remember, I am a bank employee 😉 ) and purchase shares of company paying 6 to 8% in dividend. While the stock’s dividend will be paying for my interest payment, I’ll be making an automatic spread of about 5%. On top of that, Canadian Bank stocks might be pretty low for a while, but over the long run, I’m quite sure I’ll get a good return on them.
So I gave a shout to my best friend and partner to ask him for a “good Canadian bank stock”. If you are reading The Intelligent Speculator, you will notice that he knows much more than me in term of stock trading. On top of that, he is a CFA working with traders. Since Canadian banks are high dividend paying stocks, I thought it was a good idea to ask him his opinion on them.
I am not going to give you his position on each Canadian bank, but let just say that he was not as enthusiastic as me! Here are a couple of points he told me:
– Canadian banks may cut their dividend in 2009.
Since dividend rate are pretty high for all banks, they may want to cut their dividend in 2009. This would obviously affect the stock value significantly.
– We don’t know exactly what will be the ABCP settlement.
Most banks are concerned about the ABCP settlement as there are billons frozen in this investment product. This is a huge liquidity problem and it may forces banks to declare more provision (read loss) in their upcoming financial statement.
– We don’t know if there are still surprises such as the ABCP, the CDS or another Maddof to come.
We thought we were done with bad news back in summer 2008, remember 2008 fall? Who know what is coming during winter time 😉
– Banks’ business model will change overtime and become less profitable.
Banks won’t be able to make as much money as they used to on the market. They will have to go back to a more traditional business model (customer services) and will become less profitable. Therefore, their stocks won’t perform as they used to.
– Several Canadian Banks are issuing shares (RBC, BMO, TD), what this all about?
We don’t have the answer to this question yet. It is primarily to maintain their Tier 1 ratio but I may hide something else. Acquisitions (as some banks are for sell)? Liquidity problems related to the credit crunch? I have no clue.
While I am writing this article, I am almost changing my minds on Canadian Bank Stocks. They may give us one of the most solid dividends promises on the market… this is quite a long shot!
Remember the techno? They still didn’t come back from the techno crunch yet. Is it really a good deal to buy Canadian banks? What do you think?
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