Canadian Bank Valuations Reach Record Highs, Defying Bearish Market Sentiment
Canadian bank stock valuations are in the stratosphere, at least as far as stuffy financial institutions are generally concerned. But for now, most investors are taking the wild ride in stride.
Measured against expected earnings over the next 12 months, the average Big Six bank price-to-earnings ratio sits at close to 16.5, well above the two-decade average of roughly 11.
Even Canada’s cheapest institution, Bank of Nova Scotia, is exceptionally pricey by historical standards.
The extended rally has been powered in part by the banks’ fat bottom lines. Despite an onslaught of competition from fintechs and a sluggish economy slammed by tariff uncertainty, Canada’s banking oligopoly has continued to churn out profits quarter after quarter.
That’s helped Canada’s banks outperform U.S. big tech handily. Over the past year, the S&P/TSX banking index has climbed by 64 per cent, after adjusting for currency, roughly three times faster than that of the Roundhill Magnificent Seven ETF, which holds only its namesake U.S. tech giants.
The run-up has also enriched Canadian investors, who are heavily invested in bank stocks. After all, the Big Six account for nearly one-quarter of the S&P/TSX Composite Index’s value.
Money managers are divided over how far the rally can go. In a recent survey of global fund managers by Scotiabank strategist Hugo Ste-Marie, 42 per cent said they had reduced their exposure to Canadian banks, while 58 per cent were holding for further gains.
Investors are well aware of the pitfalls of betting against Canada’s banks.
This month marks exactly a decade since the peak of the “short Canada” investment strategy, a wave of bearishness over the prospect of a housing crash that spurred investors to place big bets that Canadian bank stocks were primed to tumble.
Instead of dropping, the S&P/TSX banking index closed out 2016 up 26 per cent, leaving short sellers with huge losses.
Now, even though bank valuations have never been pricier, short interest for the Big Six is at its lowest level in years.
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This article was first reported by The Globe and Mail
