Written by Amy Legate-Wolfe at The Motley Fool Canada
A bank stock can react to Friday’s jobs report long before a single borrower actually misses a payment. Markets are helpful that way. They like to panic about tomorrow’s problem today.
Statistics Canada releases September’s Labour Force Survey on October 9. August employment fell by 42,000 while unemployment held at 6.4%, putting household finances squarely back under the microscope. For investors, though, the unemployment headline is only the beginning.
Read past the headline
Employment matters to banks in two ways. A strong labour market supports borrowing, spending and loan repayment. Yet it can also keep inflation firmer and reduce the case for lower interest rates.
Weak employment can produce the opposite cocktail. Rate-cut expectations may rise just as more customers struggle to pay their debts. That’s why a softer jobs report isn’t automatically good news for Canadian bank stocks.
I’d watch full-time employment, hours worked, wages and labour-force participation alongside the headline unemployment rate. Those details can tell investors whether households are actually weakening or the monthly number simply looks ugly. Canadian Imperial Bank of Commerce (TSX: CM) has particularly good reason to care.
Watch the borrower
CIBC operates Canadian personal and business banking, wealth management, commercial banking and capital markets. Its large domestic mortgage and consumer-lending businesses make employment particularly relevant. A customer with a paycheque can keep paying the mortgage. Lose enough paycheques across the economy, and provisions for bad loans can start climbing.
For now, CIBC enters Friday from a position of strength. Third-quarter adjusted earnings reached $2.73 per share, up 26% year over year. That’s an impressive increase. Yet I’d spend at least as much time on the credit line underneath it.
Total provisions for credit losses were $564 million. CIBC reported higher provisions on impaired loans in several Canadian businesses, partly offset by favourable movements elsewhere. In other words, the total can look steady while some borrowers underneath it get wobblier.
Don’t buy one jobs report
CIBC pays $1.07 quarterly, or $4.28 annually. At a recent $156.97, that’s a yield of about 2.7%. That yield alone doesn’t make the stock cheap. At today’s price, investors need earnings to keep growing and credit losses to remain manageable.
The dividend can still make CIBC useful among Canadian dividend stocks, but I wouldn’t buy it because I think I can predict Friday’s market reaction.
A weak report could send the shares lower. It could also lift them if investors immediately price in easier monetary policy. Markets occasionally enjoy ruining a perfectly good prediction.
Bottom line
Friday’s employment report can change expectations around rates, borrowing and credit losses in a matter of minutes. I’d use any sharp reaction to reassess CIBC rather than trade the headline. The bank’s 26% adjusted EPS growth provides a healthy starting point, but the next several quarters of provisions will tell investors far more than one Friday morning.
If employment weakness creates a better valuation while CIBC’s credit performance remains sound, that’s when the jobs report could become a genuinely useful buying opportunity.
The post Canada’s Jobs Report Lands Friday: This Bank Stock Could Move First appeared first on The Motley Fool Canada.
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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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