Canadian banks may trail the market, says analyst

The banking sector stands to gain from global developments, but Canadian banks are facing domestic challenges

Canadian banks may trail the market, says analyst

A possible repeal of the Dodd-Frank Act under a Trump administration and adjustments in Fed interest hike expectations have improved investor sentiment toward the banking sector, giving it a lift. However, Canaccord Genuity strategist Martin Roberge sees reasons to be concerned about Canadian banks, according to a report by the Financial Post.

Returns on equity for the sector have rolled over for the sector, at least relative to the broad S&P/TSX composite index. The Canadian benchmark has undergone rapid growth in earnings per share on the strength of resource stocks. “Upbeat third-quarter earnings reports among non-financial companies triggered the downturn,” Roberge said to clients.

He also noted that while net interest margins are growing for Canadian banks, the domestic housing market is at a later stage in the business cycle, while its US counterpart is closer to the middle.

Citing new data, Roberge said Canadian housing price inflation has risen 0.2% on a monthly basis and 11.9% year-over-year, signaling that the measure is plateauing. “This means weaker mortgage lending volumes expected in 2017,” he said.

Finally, he cautioned that Canadian bank stocks are overbought with excessive valuations, as the recent frenzy has left the group trading at 12.1 times forward earnings per share.

Noting that Canadian bank shares have historically lagged the market when these four factors coincide, Roberge said that he prefers Canadian lifecos, “especially if we are right and the Canadian dollar goes downhill from here.”

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