Will Canadian Banks Strengthen? Depends!
Equity markets experienced more of the same last week. Treading water in a relatively narrow trading range punctuated by periods of sharp sell-offs driven by heated political rhetoric or Central Bank pronouncements that catch the market by surprise.
Last weeks’ hiccup came when minutes from the US Federal Reserve Open Market Committee were released. The notes revealed dissension among the ranks that could lead to a change in Fed policy. Of course there was nothing new in the minutes. The dissenters have been the hawks all along and tin the end they had no real influence on Fed decisions. After this edification from analysts the markets turned bullish culminating in a strong rally on Friday. Overall the Canadian market gained week over week.
One of the stronger sectors in the Canadian economy has been financials. Not surprisingly since this sector traditionally leads when markets are rising. But this time bolstered by ultra-low interest rates and a robust Canadian real estate market the big five Canadian banks have been particularly strong. The next two weeks will shed light on just how strong. Canadian banks will report quarterly earnings in the following order:
- Bank of Montreal (February 26, 2013) – ESP estimate: $1.47
- CIBC (February 28, 2013) – ESP estimate: $2.08
- Royal Bank of Canada (February 28, 2013) – ESP estimate: $1.32
- Toronto Dominion Bank (February 28, 2013) – ESP estimate: $1.93
- Bank of Nova Scotia (March 5, 2013) – ESP estimate: $1.26
Analysts expect most of the banks to raise their dividends which should provide some support for stock prices. The bigger issue will be the post earnings analysts’ call which will discuss the banks expectations for the remainder of this year.
Analysts have concerns about the trajectory of retail lending given record high debt levels amongst Canadian consumers. Banks are already feeling the pinch in mortgage lending as the Canadian real estate market cools. If domestic lending continues to slow it will impact growth throughout the remainder of 2013. How well bank executives manage this slowdown will determine stock price performance post earnings.
Analysts believe that CIBC and Toronto Dominion have the greatest sensitivity to domestic lending patterns. Royal Bank, Bank of Nova Scotia and Bank of Montreal with their broader focus on the capital markets have less exposure.
President, CIO & Portfolio Manager
Croft Financial Group
Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.
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