Soft-landing bets fuel Canadian bank stocks despite real estate worries
Canada’s economy is stalling, the unemployment rate is rising and housing costs are crushing some households. The country’s banks are exposed to all of that, yet their shares are surging.
A major index of Canadian bank stocks is up 11 per cent since the beginning of November, erasing most of the year’s earlier losses. Including dividends, investors have made a small profit so far in 2023, in contrast to the KBW bank index of U.S. lenders, which is still in the red.
The rally is a bet on a softer economic landing in 2024, one in which bank profits won’t be badly damaged by the financial squeeze that’s hitting Canadian households because of mortgage-rate resets and higher rents.
For the Big Six banks, earnings per share dropped more than six per cent, on an adjusted basis, in the fiscal year that ended Oct. 31. They’re expected to decline an average of 1.1 per cent in the current fiscal year, according to analyst forecasts compiled by Bloomberg.
“The earnings are going to struggle to grow over the next year or two,” said Murray Leith, director of investment research at Odlum Brown Ltd., a Vancouver-based firm that manages about $18 billion. “But they’re very profitable businesses, so there’s a lot of things they can do to add shareholder value.”
Banks are restructuring with urgency during a year in which costs grew rapidly. Toronto-Dominion Bank is reducing the number of employees by three per cent, amounting to more than 3,000 positions. Royal Bank of Canada has installed new management at City National Bank, its struggling California-based unit. Bank of Nova Scotia, the most international of Canadian lenders with large operations in Mexico, Chile and Peru, is set to unveil a new strategy during an investor day on Dec. 13
Read more on financialpost.com
