Should Investors Avoid Canadian Banks Now?

Canadian bank stocks are a favorite for many domestic and foreign investors for many reasons. For example, they offer solid stable growth, pay decent consistent and dividends, etc. During the global financial most of the Canadian banks were largely unscathed. However despite the many positive factors investors need to be cautious of Canadian banks according to an article by McLean&Partners. Some of the reasons discussed by them are:

  1. “Tighter restrictions on mortgage lending: With the new qualification process, mortgages will be approved based on a higher posted rate. This means the maximum allowed mortgage for every level of income will decline by roughly 20%.
  2. Pending regulation on risk sharing of mortgages with CMHC: Mortgages insured by CMHC were considered risk free. If loans were to default, CMHC would cover it. The risk sharing regulation will require banks to share the risk of mortgages with CMHC, which will result in the banks allocating more capital against them.
  3. High debt to disposable income of Canadians: The current debt-to-disposable income for Canadians is 168%. The financial crisis in the US started when this ratio was 135%. Though there are hardly any similarities, eventually borrowers’ capacity to borrow will be curtailed, leading to substantially slower loan growth.
  4. IFSR9 will create provision volatility: An accounting regulation will require banks to provide or release provisions against loan losses faster, creating higher earnings volatility.
  5. High current valuations of bank stocks: We consider the banks to be expensive as they are currently trading at a 10-year high (Figure 4).”


Source: Caution on Owning Canadian Banks, McLean&Partners

Banks account for about one fourth of the S&P/TSX Composite index and the banks have under-performed the index only twice in recent years – once in 2007 and once in 2010.

Though all the points noted above are valid, investors need not avoid Canadian bank stocks.The benefits of owing them for the long-term far outweigh the short-term concerns. U.S. investors especially cannot go wrong owing banks from north of the border.

The bog five banks trading on the US exchanges are listed below with their current dividend yields:

1.Company: Bank of Nova Scotia (BNS)
Current Dividend Yield: 3.51%

2.Company: Bank of Montreal (BMO)
Current Dividend Yield: 3.46%

3.Company: Canadian Imperial Bank of Commerce (CM)
Current Dividend Yield: 4.12%

4.Company: Royal Bank of Canada (RY)
Current Dividend Yield: 3.34%

5.Company: Toronto-Dominion Bank (TD)
Current Dividend Yield: 3.13%

Note: Dividend yields noted above are as of Feb 17, 2017. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long BNS, BMO, CM, RY and TD


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