US Bancorp (USB -0.20%) is a large regional bank operating in about half of the country. Its stock is yielding around 5.4% today thanks to a steep stock price decline so far in 2023. That price drop is tied to concerns around the bank failures that have taken place this year. If you are looking at US Bancorp as a way to take advantage of the industry dislocation, but still have fears about the contagion spreading, you might want to consider Bank of Nova Scotia (BNS 0.43%) and its nearly 6% yield.
Not a huge risk, but...
The problem children in the U.S. banking industry have really had pretty specific issues. One of the failed banks was focused on serving crypto markets. Another had positioned itself as a major lender to high-tech companies. When times got tough, being so myopic in their business models left them overly exposed to risk. That's not the whole story, but it is an important contributing factor that differentiates them from other banks, like the far more diversified US Bancorp.
Image source: Getty Images.
The other thing that went wrong boils down to the way banks handle their balance sheets. To simplify a very complex issue, many banks chose to assign bond investments they had made to a category called held to maturity. This meant that the banks wouldn't sell the bonds, and it allowed them to carry these bonds at face value regardless of the price they would fetch if sold. Bond prices and interest rates move in opposite directions, so many of these bonds have lost value as interest rates have increased over the past year or so. If those bonds got sold for any reason, the banks would take losses, and very quickly their financial strength would be shown to be less than advertised. Customers pulling their cash out en masse would cause just this chain event. And that's the other piece of the puzzle with the bank failures and bank runs that have been taking place.
US Bancorp isn't immune to any of this, but it is fairly large, has a diverse footprint and product list, and is likely to muddle through the current industry problems. More aggressive investors might want to buy it now that a roughly 20% stock price decline in 2023 has pushed the yield toward levels not seen since the Great Recession.
Of course, US Bancorp cut its dividend during the Great Recession, like many of the largest U.S. banks, so maybe the high yield seems like just another risk to consider. These are difficult and uncertain times in the U.S. banking sector, so caution is probably appropriate.
A high-yield alternative
But that doesn't mean you have to avoid all banks -- Scotiabank, as Bank of Nova Scotia is generally known, is actually up 5% or so this year. This Canadian bank offers investors a dividend yield of nearly 6%, even better than what you'd get from US Bancorp following its steep price decline. Meanwhile, Scotiabank has increased its dividend in 43 of the last 45 years and paid a dividend consistently since 1833. The key to the disparate stock performance is the fact that Scotiabank has little exposure to the U.S. market, with the country accounting for just 12% of the bank's earnings.
Once you know that fact, it makes sense that Scotiabank has gone largely unscathed by the concerns in the U.S. banking sector. But that doesn't mean Scotiabank is risk-free. It generates around 42% of earnings from Canada, a market that is heavily regulated and highly conservative in nature. It is a strong base from which Scotiabank has chosen to expand in South America. It has material positions in Mexico (14% of earnings), Chile (11%), and Peru (8%), among other areas south of the U.S. border.
South America isn't exactly known as a bastion of fiscal prudence, so there are still risks to consider with Scotiabank. However, this is a long-term focus. Management has obviously navigated the region's risks without detrimental impact to its dividend. The same can't be said of US Bancorp, noting its nearly 90% dividend cut in 2009. Scotiabank, by contrast, has proven itself over time to be a reliable and, despite its South American growth efforts, conservative steward of investor capital.
Thinking outside the box
Contrarian investors often see industry breakdowns like the problems in U.S. banking as an opportunity to buy stocks on the cheap. If that sounds like you, but you still have concerns that a company like US Bancorp could get caught up in the melee (like it did during the U.S. housing crisis), it might be time to think even further outside the box. Scotiabank is an interesting, and high-yielding, bank that largely avoids the U.S. market because its growth plans aren't focused on the country. Although the stock hasn't sold off, that may actually make it an even more attractive investment option right now.
