For many Canadian investors, choosing one or more of the country’s big banks to put into one registered retirement savings account (RRSP) or tax-free savings account (TFSA) has become commonplace, and for good reason. These banks have traditionally paid above average dividend yields, raising their dividends on a frequent basis, all while continuing to grow internationally and introducing new technology to improve operational efficiency.
It is true that all these tailwinds do make the case for owning these blue-chip stocks long-term. But it should be noted that the coronavirus pandemic has fundamentally changed the game for investors considering financial stocks.
The depressed stock prices of most major Canadian banks largely reflects sentiment around interest rates and the health of the Canadian consumer. The Canadian economy has taken a big hit.
With increased government borrowing tied to record low interest rates, most economists and analysts believe we could see zero or near zero interest rates for a very long time. Such an environment is extremely negative for lenders, due to a reduction in the net interest margins (NIMs) these lenders earn.
With borrowing also likely to slow due to a Canadian consumer that is nearly tapped out due, in part, to years of skyrocketing housing prices, headwinds are forming in terms of revenue generation for banks over the medium term. I’d thus encourage investors to be hedged if taking a position on Canadian banks or stay on the sidelines for now.
Invest wisely, my friends.
