Canadian Banks – More Upside?

Canadian Imperial Bank of Commerce (TSX: CM) was one of the hardest hit of the Canadian banks in the financial crisis. But it seems to have pulled itself up by its bootstraps, with share price doubling from a bargain-basement low near $40 in February 2009 to a recent $82.60. The bank reported first-quarter earnings of $1.92 per share (vs. estimate of $1.77), up from $1.58 a year earlier. It’s also planning to buy back hundreds of millions of dollars worth of hybrid bonds and is considering early redemption of preferred shares and other instruments that no longer count as Tier 1 capital under the Basel banking accords.

Toronto-Dominion Bank (TSX: TD), followed suit with net first-quarter earnings per share of $1.69, up from $1.44 a year ago. It also announced a $0.05 dividend increase, to $0.66 per share. Shares climbed to a 52-week high of $84.42 this week. Royal Bank of Canada (TSX: RY) reported net earnings of $1.24 per share for its first quarter, up from $1.00 per share a year ago. Shares climbed to over $60 this week.

The question is whether the banks are bumping up against some strong resistance points. They may be, but it seems unlikely that any of Canada’s big six are likely to sell off dramatically, given the solid growth in the Canadian economy. More likely we will see the banks consolidate in their current price range, before moving higher.

If you own shares of TD and RY and participated I the recent rally, then you might look at writing some short term covered calls on your position. For example, with TD closing out the week at $83.60 you could look at writing the March 84 calls at 90 cents. With RY at $59.59, look at writing the March 60 calls at 45 cents. These trades only make sense if you have participated in the recent rally and want to generate some cash flow until these stocks can break through their resistance points.

If you are looking to speculate on the financial sector, you could look at buying longer term calls on the banks with the most potential upside. That brings us to CIBC (Fridays close: $82.60), still crawling its way back from the financial meltdown. There are more potential upside surprises with CIBC, although when you think about a surprise it can work both ways. That said, you might consider buying the CIBC October 84 calls at $3.40 or for the more aggressive trader, the CIBC October 92 calls at $1.40.