Sure, bank stocks face credit risks. But some perspective is needed

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Bank stocks are already reflecting economic uncertainty, limiting the downside risk of holding on

One clear theme ran through the latest quarterly financial results from Canada’s largest banks: Lenders are setting aside far more money to handle wonky loans, renewing concerns about how ugly this credit cycle will get.

CIBC isn’t alone here. Its peers also reported sharply higher PCLs during the earnings season. The total for the Big Six banks rose to $3.5-billion during the quarter, up 130 per cent from the same period last year.Again, CIBC offers a stark example. Ignore PCLs and the bank delivered a quarterly earnings gain of more than 13 per cent compared with the third quarter of last year. After including PCLs, though, CIBC’s net earnings fell 14 per cent.

Still, investors might want to control the urge to flee from the sector. There are some compelling points in favour of holding onto Canadian bank stocks, even as lenders look increasingly vulnerable to shifting financial conditions.Since 2000, the average PCL ratio – which essentially compares the value of troubled loans to the total value of all bank loans – is 0.41 per cent, according to RBC Dominion Securities.

The bad news, of course, is that there is no clear indication that losses will stop at normal levels – especially if interest rates remain higher for longer, or a recession challenges the ability of unemployed consumers to meet their loan obligations. Valuations also point to a sector that is already reeling from the frayed nerves of investors. CIBC shares trade at just 7.3 times the 2024 profit estimate from RBC Dominion Securities, compared with a historical average price-to-earnings ratio of 9.7.

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