Why banks have become an analyst versus market scenario

Earnings held almost steady in Q4 and advisor says banks remain 'very inexpensive'

Why banks have become an analyst versus market scenario

The banks are still holding up very well in a tough market, even though the market is pricing in sizeable discounts, says one industry leader.

“Our views on the banks are unchanged from the quarter, which is to say that they are still very inexpensive,” Rob Wessel, managing partner for the Toronto-based Hamilton ETFs, told Wealth Professional.

“The market is pricing in some sizable earnings per share reductions from the sell side and, in the quarter, they didn’t get that. So, earnings estimates, for all intents and purposes, remain stable.”

Wessel said Hamilton ETFS sees that it has become an analyst versus market scenario with the analysts believing the banks can attain certain levels of earnings, which is reflected in their estimates. But, the market has fairly sizable discounts and is assigning a high probability that those numbers will drop in this quarter. That didn’t happen, and the banks reported earnings almost equal to last quarter. They were $14.3 billion this quarter and $14.4 billion last quarter. So, the quarter ended up being a draw. The earnings were also higher than the $12.3 billion the banks reported before the downturn started.

“There was no real movement, but the market is a lot more worried than the analysts,” said Wessel. “The banks continue to be weaker. They certainly didn’t rally. And, yet, you still have some very respectable operating results. So, it’s basically a stalemate between the market and analysts.”

Hamilton ETFs expects the probability of a large downward movement to be relatively low. So, the banks remain inexpensive, and he still considers them a good risk reward right now and expects they will remain at the current level for awhile.

“It’s still going to take a lot of bad news to prove out the markets’ expectations,” said Wessel, noting that Hamilton ETFs still views banks as very healthy.

Looking ahead to 2023, he said, the picture will depend on when the Bank of Canada stops raising rates and what impact that has. Right now, the market is pricing in a very weak economy, if not an actual recession. If there isn’t one, the banks will do very well. If there is a severe economic downturn above what the analysts are forecasting, then investments will decrease.

“That doesn’t seem like it’s the most likely outcome right now,” said Wessel. “At minimum, Q4 did not validate that investment thesis.”

Wessel said it will be interesting to watch banking sector in 2023 as the three biggest bank acquisitions in history will close next year.  TD Bank is buying First Horizon in the U.S.. The Bank of Montreal is buying the Bank of the West, also in the U.S., and now RBC has announced that it plans to acquire HSBC Canada. Wessel noted they are all basically cash bids after the banks built up cash during the pandemic. So, he said, “it’s hard to believe they won’t contribute to underlying growth and therefore support stock prices.”

Hamilton ETF’s Hamilton Enhanced Canadian Bank ETF remains the top-performing Canadian bank ETF since its inception. Wessel considers it the best vehicle to get exposure to this sector. Its annualized return is 25% since inception, 18.4% for the last two years, and zero for the past year.