The Canadian bank stocks are rallying on the backs of the anticipated U.S. move to temporarily dispense with mark-to-market accounting. Bank of Montreal (BMO), to pick but one, is clearly benefiting…up ~20% since our post of March 8th (see prior post “Bank Dividend Deja Vu“) again pointed out the ~11% divi.
Now that bank stocks have rallied off their floor, pushing implied dividend rates lower, what does this mean for those who thought that rates north of 10% telegraphed, with some alleged certainty, that banks just had to cut their dividends to ensure solvency? (We are waiting for them to recant. You know who you are.)
Here was the other side of the coin: BMO insurance deal confirms dividend safety (Jan. 13-09). Now that the Mark-to-Market rules appear to be in the process of being amended to save the world from Depression, the benefit to Canadian banks of voluntarily canceling their own dividends in an effort to husband cash no longer makes as much sense as a week ago (see prior post “RBC bank analyst joins our divi cut bandwagon” March 9-09). It isn’t as much of a competitive disadvantage.
Whether we are witnessing a bear market rally or the beginning of the long and slow march back to 14,000 remains to be seen. But the fear of further massive bank losses is already subsiding.
Before you rush out and try to buy the bounce, have a look at the one year share price charts. Similar bank share rallies have taken place in July, December and January. And each time you could have bought more for a lot less a few weeks hence. Which is not to say that the U.S. government’s Mark-to-Market moves aren’t a game-changer.
Disclosure - I own BMO.