Strategists and analysts at Scotiabank are bullish on Canadian bank stocks, but only for the short term and primarily as a bet against another financial sector: life insurance. Longer term, the unwinding of the domestic debt bubble and rising funding costs are expected to limit returns from the banks.
Banks generate profit on loans by borrowing funds at short term rates and lending them to clients at longer term rates. The current environment, where the Bank of Canada has pushed short-term rates higher but longer-term rates have barely budged, has detracted from profit growth. The end of rate hikes, according to Scotiabank, will prove a catalyst for bank stock prices.
Mr. Ste-Marie and Mr. Grauman believe short-term rates, and thus bank financing costs, will remain elevated in the coming years. In addition, the debt-ridden consumer balance sheets in Canada combined with rising loan rates will force banks to build funds against potential losses and bankruptcies.
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