Why BofA believes U.S. banks offer better value than Canadian lenders. Plus, a ‘buy and hold’ portfolio that really worksBofA Securities analyst Ebrahim Poonawala completed a series of interviews with top Canadian bank executives and concluded that for institutional money managers, U.S. banks provide better value.
Higher PCLs are a direct result of Bank of Canada rate hikes that have increased borrowing costs. Mr. Poonawala notes that domestic consumer insolvencies are up 23 per cent year over year and business insolvencies jumped 60 per cent, albeit from extremely low levels. The S&P/TSX Banks Index has underperformed the S&P/TSX Composite Index over the three-month, year to date, and three-year average annual return periods. This was not easy to achieve since the major banks make up such a large portion of the benchmark. Not only have the banks lagged the TSX, they have also trailed their global peers. Year to date, Japanese, Australian, European, U.S. and Nordic banks have all outperformed Canadian lenders.
The year-to-date underperformance of the banks is all the more surprising in that earnings revisions were significantly positive for Royal Bank, TD Bank and CIBC. Positive earnings revisions would historically have translated into sharp price rallies in previous periods and the lack of response now implies skeptical investor sentiment.
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