Canadian banks and their stocks doing fine, so far

If judged by the performance of their stock prices, Canadian banks have been doing very well over the past few months. The S&P/TSX Capped Financial Index has risen by 9.5% since mid-November 2016. Several bank stocks have beaten their historic records lately in anticipation of higher profits which the banks may post next week when they are scheduled to present their fiscal first-quarter reports.

The Financial Post provided estimates by several Bay Street analysts who expect the leading banks in Canada to post a 7% average increase in profits from a year ago. This has helped drive their stock prices, but has also called into question bank stock valuation levels. The Post quotes Barclays Plc analyst John Aiken who called the Canadian Banks Index current multiple of 13.8 times earnings “stretched”. Aiken believes that the market is pricing in a more optimistic outlook than what is reflected in analysts’ forecasts based on the expectations of higher interest rates. 

As interest rates may go higher in the U.S. sooner than in Canada, this would benefit those Canadian banks which have bigger operations in America, such as BMO, TD and Royal Bank of Canada. But it is not all rosy for the American banks at the moment. Independent research firms have recently noted that American banks are currently tightening lending standards on most loan categories while demand for commercial, industrial, consumer and mortgage loans is waning. In fact, commercial and industrial loan growth in the US is now contracting on a 3-month rate of change basis. 

Whether this prospect will halt bank share price growth or the interest rates hikes will be enough to compensate for the negative factors, we will soon find out.

Ukrainian Credit Union Limited