Canada’s biggest banks have defied experts’ expectations for the past year. How long can they keep it up?
The Big Six banks have surpassed pessimistic predictions over the past year, going on a 12-month rally that belied slumping commodity prices and concerns over a housing bubble. And with the arrival of earnings week, analysts are convinced that Canada’s major banks can continue to perform.
“Talk of deregulation and rising interest rates (this part isn’t just talk) have propelled bank stocks to all-time highs,” said CIBC Capital Markets analyst Robert Sedran in a note to clients, according to the Financial Post. “[T]he banks have shown that they can grow earnings as projected in a less-than-ideal environment and the operating environment looks poised to improve.”
Barclays Capital analyst John Aiken also noted how the banks’ dividend track records and relative safety have given them favorable valuations compared to others. “They’re not immune to pressure, but they definitely have a greater level of stability on their earnings and outlook,” he said in an interview.
Looking through a macroeconomic lens, Cormark Securities bank analyst Meny Grauman said in a note to clients that optimism is supported by gains in the labor market, which has implications on loan growth and domestic loan loss provisions. He expects the largest lenders to achieve average earnings-per-share growth of 7%, accounting for an American pro-business tide that is expected to lift earnings among the banks’ US units.
While the Big Six’s may continue to move forward, they may do so at a slower pace. With their shares trading at a 12.7 multiple this year and their price-earnings ratios shooting up 31% in 2016, valuations have very little room to expand further. According to Aiken, either earnings will grow into the current multiple or, in an unlikely development, the multiple will come down.
Credit quality and loan growth will also be key considerations for investors. Given the sustained strength in credit quality, investors are anticipating the beginnings of a reversion to the mean, said Aiken. Grauman noted that domestic loan growth is relatively flat at just above 5%, with a slowdown in household and residential mortgage being offset by business growth.
The deciding factor, according to Aiken, will be capital-markets performance after a significantly strong 2016. “That’s what’s going to drive the majority of any beats or misses against expectations,” he said.
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