Continued confidence in Canadian banks despite recent global market volatility
| Market Insights Confidence in the Canadian financial sector amid global market volatility | | While equities, specifically bank stocks, may be volatile over the short term, we continue to have confidence in the Canadian banking sector over the medium to long term. Here’s an overview of what caused recent volatility in the financial sector and why we maintain ownership of several banks within our portfolios. | | What caused financial sector volatility? | - Canadian banks declined 8.6% from March 1, 2023, to March 22, 2023 amidst the financial sector developments originating in the US and Europe. Throughout the same period, the broader S&P/TSX Composite Index declined by 3.2%.
- We believe the issues affecting SVB were largely idiosyncratic. SVB’s management team made a series of errors that ultimately resulted in a loss of confidence by the market and deposit holders.
- With US regulators taking measures to boost confidence in the US banking system, we don’t believe this will have broader implications to the global financial sector.
- During this time, Canadian banks and their US subsidiaries weren’t at risk or in need of funding or bailouts.
| | | | | Why bank failures are unlikely to happen in Canada | - Canadian banks have been selective in their US acquisitions, are well capitalized and are more active in managing interest rate and liquidity risk than US regional banks.
- Canadian banks face greater scrutiny by regulators on their liquidity requirements versus US regional banks and have a more diversified deposit and funding base.
- OSFI increased capital ratios effective February 1, 2023 which will further enhance the stability and resiliency of the Canadian banking sector.
- There have been a total of 563 bank failures in the US since 2001. Canada has not had a major bank failure in nearly 100 years. This illustrates how common bank failures are within the US, and how resilient the Canadian banking system is in comparison.
| | | | | What’s the outlook for Canadian banks? | - We believe interest rates will remain elevated throughout 2023 acting as a tailwind for banks.
- Credit conditions remain healthy and better than they were pre-pandemic in 2019, despite interest rates currently being at their highest levels since the Global Financial Crisis.
- If a recession happens, we could see Provisions for Credit Losses increase which will act as a headwind on earnings.
- However, we continue to see medium- to long-term strength in the Canadian banking sector and very often, the best time to invest in Canadian banks is during a recession. Markets are forward looking and typically anticipate an economic recovery even while a recession is underway.
- We believe banks are attractively priced. Valuations for the banking sector are two standard deviations below their historical average using the Forward P/E ratio, which suggests there could be a future reversion to the mean.
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