BofA Securities recently held its annual Canada Banks Day with high-ranking executives, providing valuable insight into the domestic economy and the banking sector.
The impressive lineup of industry speakers for the event included BMO Financial CEO Darryl White, Scotiabank CFO Raj Viswanathan, Royal Bank CFO Nadine Ahn, TD Bank CFO Kelvin Tran, CIBC group head of capital markets Harry Culham, CIBC head of global markets and direct financial services Christian Exshaw and CIBC CFO of capital markets Zeeshan Ali.
BofA bank analyst Ebrahim Poonawala summarized the executives’ comments about the business environment, noting at first a “high degree of caution” on the economic outlook. In the mid-term, banks are concerned that structurally higher interest rates will depress consumer spending and debt demand.
Four important trends were emphasized for a domestic housing market set for a “reality check”. One, the potential for extreme pressure for speculators of pre-construction condo units as demand falls. Two, the hot Toronto rental market. And three, the hard hit to vacation home prices. The fourth part of the discussion highlighted the potential for debt restructuring for mortgage holders unable to handle higher borrowing costs.
Mr. Poonawala sees the uncertain outlook for bank stocks largely reflected in valuation levels. In terms of forward price to earnings ratios, the current average of 9.2 times is well below the 10-year median level of 10.9 times. The average price to book value at 1.4 times is also significantly lower than the 10-year median of 1.8 times.
In terms of comments on individual bank stocks, the analyst saved his most bullish comments for Royal Bank: “Royal [is] holding all the cards,” he wrote. “Margin tailwinds on the back of a high quality retail deposit base, disciplined expense management and significant capital flexibility has positioned Royal particularly well for this period of heightened uncertainty.”
My overall sense after reading the full summary is that the banks are bracing for more difficult operating conditions that are already reflected in low valuation levels. The outlook for investors in the sector seems neither bullish or bearish as management attempts to muddle through while rewarding shareholders with high dividend payouts.
-- Scott Barlow, Globe and Mail market strategist
Also see: Here’s how the housing market will affect bank profits
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Compiled by Globe Investor Staff