2023-03-23 06:59:17 ET
Summary
- The past month saw several bank stocks "go to $0," as they failed and their shares stopped trading.
- This got a lot of investors nervous about the banking sector.
- Fortunately, the large banks are collecting deposits from the smaller banks, and improving their capital position in the process.
- However, they have still gone down in price like the regional banks, so their yields are now higher than before.
- In this article, I explore three high-yield bank stocks that are unlikely to go to $0.
The month of March saw several bank stocks go to $0 due to bank runs. Silvergate , Silicon Valley Bank and Signature Bank all failed, while Credit Suisse was saved at the last minute by a buyout from UBS ( UBS ). The selling in bank stocks while all of this was going on was pretty intense. Investors were even selling large U.S. banks alongside the struggling mid-size banks, as sector wide selling dragged down even the strongest individual names .
The drama in the banking sector has calmed down since the peak of the panic last week. There haven't been any new failures since Signature Bank, and bank stocks rallied on Tuesday. Nevertheless, bank failures are still on many investors' minds. Banking is an industry where, in the worst case scenario, an investor can lose it all. That's technically true of all sectors, but in the post-GFC era , it seems like a bigger risk for banks than for other companies. True or not, that's how some people feel.
Nevertheless, bank stocks offer the potential for very strong returns. If you'd purchased Bank of America ( BAC ) at the low in 2008, you'd be up 608%, not even including the dividend. That's much better than the return the S&P 500 delivered in the same period. In this article I'll explore three high yield bank stocks that could deliver good returns, and are unlikely to go to $0.
Royal Bank of Canada ( RY )( RY:CA )
Royal Bank of Canada is a Canadian bank with a 4.08% yield . If you're American, the dividend is subject to a 15% withholding tax, but you don't have to pay that tax in a 401k. If you hold it in an account other than a 401k, the yield is still higher than what you'd get on an S&P 500 fund , and even many bank stocks.
How safe is Royal Bank of Canada?
Going by liquidity, it appears to be fairly safe.
According to its recent earnings release, RY had the following assets:
-
$86.2 billion in cash due from banks.
-
$93.4 billion in cash held at other banks (bringing total cash to $179.7 billion).
-
$320 billion in securities.
So we've got $499 billion in extremely liquid assets. Against that is $1.2 trillion in deposits. So, 41.6% of RY's deposit base is covered by assets that either are cash or can easily be turned into cash. This bank probably isn't going to $0 any time soon.
Royal Bank Balance Sheet (Royal Bank)
A big draw for RY, like many Canadian banks, is the dividend yield. 4.08% is above average even if you have to pay a 15% withholding tax on it, and it could grow over time. Currently, RY has a 44.5% payout ratio and a 6.97% five year CAGR dividend growth rate. It takes 11 years to double your dividend at a 6.97% compound annual growth rate. So, if RY keeps up its historical dividend growth into the future, then investors could end up with a hefty yield-on-cost.
U.S. Bancorp ( USB )
U.S. Bancorp is a U.S. bank with a very juicy 5.12% yield . Its five year CAGR dividend growth rate is 10%, which means that it would take a mere 7.2 years for the dividend to double, were historical trends to persist.
One good thing about U.S. Bancorp is that its liquidity coverage ratio, according to JPMorgan ( JPM ), is 122% . This is higher than the most recent liquidity coverage ratio that Bank of America reported ( 120% ), and Bank of America is usually thought to have good risk management practices.
U.S. Bancorp isn't the cheapest bank stock you'll find today. At today's prices, it trades at:
-
10.1 times earnings.
-
2.5 times sales.
-
1.31 times book value.
-
2.52 times operating cash flow.
Many other banks can be bought below book value today, including some big banks, so USB looks slightly pricey compared to some of its peers. Nevertheless, its strong liquidity suggests that it's a very stable bank that's not going to $0.
Postal Savings Bank of China ( OTCPK:PSTVY )
This is a 5.8% yielding bank stock I started reading about fairly recently. I first learned about it when I looked up Li Lu's Chinese portfolio and found it listed there. If you check Li Lu's 13Fs and don't see this stock on the list, don't worry: you can find it on the HKEX Shareholder Lookup website.
Postal Savings Bank of China is very liquid. It has $882 billion in liquid assets and $1.7 trillion in deposits, so its most liquid assets are 51.9% of deposits. This suggests that PSTVY could survive a surge in withdrawals if it experienced one. It has a 197% liquidity coverage ratio , which also suggests high liquidity.
One unique thing about PSTVY is its relative lack of exposure to the riskiest areas of the Chinese economy. It's a retail bank mainly providing loans to low income Chinese people and small businesses, so it isn't too involved in the Chinese property crisis, which has seen big developers like Evergrande default on their loans.
PSTVY stock is extremely cheap . At today's prices, it trades at 5.2 times earnings, 1.4 times revenue, 0.51 times book value, and 1.55 times operating cash flow. This is the kind of valuation you often see the riskiest mid-sized banks trading at, yet it's one of China's biggest banks, with extremely good liquidity. It looks like the risk in this name is being severely overestimated.
The Bottom Line
Banking is a scary pond to go fishing in right now, which is all the more reason to look into it. The more worried people are about a particular sector, the more opportunities will abound in it. Certainly, some banks will go under in the future, just like Silicon Valley Bank did in the past. But if you buy liquid, well capitalized banks that are falling in price only due to sector issues, you should do well.
For further details see:
3 High Yield Bank Stocks That Likely Won't Go To $0