During the recent down-market, the North American financial sector was among the ones on slippery roads. Yet, Canadian banks could still prove us wrong, as they are widely expected to post record profitability for the third quarter.
Certainly, since May, it was a rocky ride. On average, Canadian banks have shed about five percent of their cumulative market value, and they all still remain about ten percent down from their 52-week highs. But, with their earning season being just around the corner, many analysts feel Canadian banks could be among the few and far between bargains around. Why they think that? Simply, the May sell-off could have very well been far too brutal, bringing the banks down to severely discounted levels. And thus, making them very interesting to investors.
So what brought the bacon home? In one word–lending. Although in Canada interest rates have been rising since September of last year, they are still historically low. By extension, consumer and business borrowing hardly eased up. Plus, since Canadians are on average saving more than their neighbors south of the border, bad loans have still remained a relative rarity.
The May down-market was really rough for the banks. Underwriting, as well as mergers and acquisitions, almost lost the pulse. With it, lucrative underwriting fees went out the window too. On top of that, with rising interest rates, everyone was expecting one of the nastiest credit cycles in recent history.
As it turned out, the doomsayers missed their target at least on one thing–lending. Apparently, wanting big ticket items, such as houses and cars, hardly subsided.
Being true contrarians, it is our duty to look for the Achilles heel in the banking sector. By all accounts, the investment banking side is still treading murky waters. IPOs are understandably rare, although the takeover frenzy within Canada’s mining industry shows some promise. The only problem is that Canada’s foreign investment policy is so screwy that we just let go of the opportunity to create the biggest nickel producer in the world. This will hardly hold interest for more of the similar activity and is very likely to cost Canada’s banks of many lucrative advisory fees.