Senior analyst John Aiken thinks there are reasons to be cautious in the near term
With so much economic uncertainty, and in the wake of the regional bank collapses seen south of the border, can investors feel confident in holding Canadian banking stocks?
The subject was addressed in a Financial Post discussion with John Aiken, senior analyst at Barclays, who acknowledged that there are some concerns in the near term but for those investors with a time horizon longer than 12 months there are reasons to be optimistic.
He believes that, as with previous challenging conditions such as the financial crisis of 15 years ago, Canadian banks will protect the dividend and are “exceptionally safe” even given the potential for a recession.
“We don’t see the economic impact being enough to impact capital,” he said. “We don’t see banks having to raise capital or anything like that.”
While he noted that Canada’s domestic banks look similar, he advised diversification and said that the banks have different strategies which means investors can “almost get the strategy that you feel will grow the best.”
He added that the levels of capital held by Canadian banks adds to their resilience, while higher interest rates have provided positive impact for their margins, although longer term he expects this to moderate, especially with loan growth easing.
Banks’ wealth management operations are expected to be one of the bright spots for Canadian banks in the quarters ahead.
International market risk
However, he noted that those banks with greater exposure to international markets may have a larger credit risk although the potential for longer-term growth of these markets may appeal to investors as part of their diversified banking sector holdings.
Aiken told the Financial Post that the less competitive market among Canada’s big banks relative to the hyper competitive US market, adds pressure to the US market.
While this can mean higher risk in investing in US banks, it can also produce better returns when growth is strong.
