Bank financial institutions usually make money by borrowing short and lending long (i.e. having their cost of capital at the short-term interest rate, while earning money with the long-term interest rate). The flattening yield curve is making it more difficult for financial institutions to capture this spread and this is reflected in what we see in Canadian bank stocks.
Looking at the six majors (TD, BNS, RY, CM, BMO and semi-major NA), they are all down for the year. Looking at the juniors (CWB and LB), they are also down, especially in LB’s case (which has some other business operation issues that I will not get into this post, but suffice to say there is a reason why it is trading at less than 75% of book and a P/E of 8).
There are also other quasi-banks (e.g. EQB, HCG, FN – yes, I know FN is not a bank, etc.) that appear to be doing reasonably well despite their obvious reliance on the stability of the Canadian mortgage market.
Some people are advocating that this is a good time to get into the sector as traditionally most of Canada’s big banks have proven to be stable in history, and the big banks are making record amounts of profits.
Assuming you had to be locked into an investment in these Canadian banks, the proper question to answer is whether these institutions will continue making money at the rate they have been making it historically that justify their valuation. They look cheap from a historical perspective, but just relying on historical analysis is a very dangerous method of investing. There is a lot of competition in the financial sector domain and I am not sure whether forward looking, profitability will be as strong as it has been in the past half decade. The easy money appears to have been made.
In general, I would not be surprised at all to see the major banks tread water price-wise for the next few years or even see investors today take small unrealized capital losses over that time frame while clipping their 4-5% dividend coupons.
Finally, I will clarify this post does not take into context the insurance sector (e.g. MFC, SLF, etc.) which has their own dynamics. I also do not hold anything mentioned in this post, although I have taken a hard look at LB and CWB recently.
While I agree with the basis of your argument that past performance is not indicative of future results. However you completely ignore the Oligopoly that is Canadian schedule 1 banks. I recently deployed some capital on CWB as the valuation is not indicative of their historical book being so leveraged to oil.
Also if you back test for example CM common stock and only bought it when it yeilds more that 5% you would be a very content individual.
It hit 5.10% this week
Thanks Sacha….any thoughts of Timbercreek financial….there debentures look like they may be heading to the lower 90’S ?
any thought’s on….you need an edit feature.
I don’t know how to enable editing on WordPress comments for users without requiring some sort of registration.
Anyway, I took a quick look at Timbercreek and don’t see anything compelling at current valuations.
Thanks for checking….
Have you done a sweep lately……gotta be something peaking your interest?
Ive picked up some CHE.DB.B at 9o, IVQ.DB.U at 78
https://divestor.com/?p=7908
I used to be a client at LB, mostly beacause they offered a cheap package for my business trough my association.
I left them mostly because they were behing technology wise, could not do some operation like paying my providers directly trough Interact or deposing a check with a picture.
So I moved to RBC.
That was about 5 years ago, don’t know where they are. But I just think it’s getting harder for small bank to keep up with the big 5.
@Marc: Chemtrade did get my attention. Probably another example of dividend/distribution chasing when leveraged entities finally have to face high costs of capital when they roll over their debt. But still watching this one. I do like those “plunging” types of stock charts. I’ve been seeing a few of them lately.
While I’m not equating this to 2008 in any way, recall at that time that unsecured debt of huge, credible corporations were trading at insanely huge YTMs. Like Sprint Corporation’s long-term debt was trading at something like 20-25% YTM in the middle of it. I’m not waiting for that, but what I’m saying is that what is cheap today can be even cheaper tomorrow, similar to how high-flying valuations of things (Bitcoin was a great example, I’m talking about the late 2017 upswing) can get even higher simply because anybody rational has already sold it at lower prices!
Thanks for the reply. Your probably a lot more conservative than me….there are a few 2 to 3 year debentures out there trading below par which I’ve picked up…….and some longer ones (5 yrs max)
trading well below par. I then place a buy order for the above mentioned debentures for about 5% less than my original fill. Worked well for me 2016……
We’re probably in the first few innings of this downturn.
Most of those debentures as well have very good reasons for trading down. For example the old Liquor Stores income fund (now CLIQ) was very lucky to find somebody willing to purchase its debentures at 4.7% let alone them trading at near-par for so long.
Most of the oil and gas debentures are trading low for obvious reasons. If you think there will be a comeback then you want to be in the equity, not the debentures.
Also on fixed income, REITs have been hit. There has been little escape from the carnage except in short-term bonds and to a lesser extent, gold!