Major index of bank stocks saw an uptick by 11%
The stocks of Canadian banks have seen a significant uptick despite issues such as the country’s economy stalling, a rising unemployment rate, and housing costs, as reported in an article by Bloomberg.
A major index of Canadian bank stocks has risen by 11% since the start of November, which has erased the losses felt earlier this year. With dividends included, the numbers show that investors have made a small profit in 2023, which contrasts with the KBW Bank Index of US lenders.
The rally suggests a bet that there will be a softer economic landing in 2024 which depicts that bank profits will not be badly impacted by the financial squeeze felt by Canadian households due to mortgage rate resets and higher rents.
Notably, the six largest banks in Canada saw their earnings per share drop by more than 6% in the fiscal year ending on Oct 31.
“The earnings are going to struggle to grow over the next year or two. But they’re very profitable businesses, so there’s a lot of things they can do to add shareholder value,” said Murray Leith, director of investment research at Odlum Brown Ltd.
According to forecasts by analysts that were compiled by Bloomberg, banks expected a decline at an average of 1.1% in the current fiscal year.
Growing concerns for banks
Following a rapid growth in costs, banks restructured with urgency. Toronto-Dominion Bank (TDB) reduced its employees by 3%. The Royal Bank of Canada (RBC) installed new management at the City National Bank, which was its struggling unit based in California. Bank of Nova Scotia is set to release a new strategy during an investor day under its new CEO, Scott Thomson.
“If you look historically, when the valuations get down at these levels, it’s normally a pretty good starting point to buy Canadian bank shares,” said Leith.
Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), the country’s banking regulator, said that consumers being heavily indebted, as well as exposure to commercial real estate, were two of the bigger concerns still facing Canadian banks.
“But we haven’t seen very significant losses in either of those sectors and those two risks haven’t worsened in the six months,” said Routledge.
“It seems like the Bank of Canada has done their job and nipped off inflation,” said Andrew Moor, CEO of EQB, Inc.
“We’ll see interest rates presumably start to decline next year, which will create a bit of relief on the mortgage side, and I think it’ll breathe a bit more life into the housing market,” he added.
