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.