By: Jeff Sanford
A slew of new reports suggest the stability of the Canadian banking sector is paying off in a variety of ways for clients, investors, the Canadian economy as a whole.
A Bank of Canada report released this week proves what many have known for some time: When it comes to surviving global economic volatility, there is no safer place to be than the Canadian big banks.
“After the financial crisis the world realized that not all large financial institutions are created equal. The collapse, or near collapse, of some of the biggest names in finance made investors taker a deeper look at the institution where their wealth was held,” says Adam Doering, vice president, Waterfront Group, CIBC Wood Gundy
“The Canadian banks showed their stability in the crises, are now regarded as some of the most sound financial institutions in the world. They can offer peace of mind to the wealthy clients who have entrusted them with their life savings."
Doering's comments are confirmed in a variety of recent reports and analyst comments.
The latest Bank of Canada Review contains a report suggesting Canadian dollar-denominated bonds are being bought up by foreign central bank reserves in greater amounts than ever. That is, central banks around the world are recognizing the stability of the Canadian financial system and investing assets in Canadian dollar-denominated assets.
According to the Bank of Canada, foreign central banks now hold about US$200 billion worth of Canadian dollar debt; this amount represents 1.8 per cent of official foreign reserves.
Another bit of good news
on the Canadian banking sector: Analysts expect Canadian bank stocks to return 10 to 15 per cent in 2014. This is a stellar return in an era of rock-bottom interest rates. This is also an achievable goal -- just a quarter into the year the TSX Bank Index is already up 3 per cent.
Better yet, the good news in the banking sector is expected to extend years into the future: The Bank of Canada and the U.S. Federal Reserve are expected to hike interest rates next year. Such a hike could see profit margins at the bank expand as spreads on lending widen. This could add as much as 20 per cent to earnings of the Big Six Canadian banks by 2016-2017, according to Michael Goldberg, banking analyst with Desjardins Financial.
As it is, Canadian banks with the most exposure to the Canadian domestic market are the strongest market performers this year. A report in the National Post notes that CIBC, the bank with the highest exposure to the domestic Canadian market, is also the best performing bank stock this year. CIBC is the front-runner this year, rising more than seven per cent year-to-date. Scotiabank, the Canadian bank with the most foreign exposure, is the laggard of the group.