Canadian banks were hit with tougher regulations this week, adding yet another reason for investors to take a dim view of a sector that has been throttled by economic fears, deteriorating credit conditions and a recent U.S. regional banking crisis.
And some contrarians love it.
Just about any beaten-up stock can attract investors who like to buy names when they are cheap and out of favour. But Canadian bank stocks have a special appeal to bargain hunters, in part because stable dividends offer a compelling rebuttal to doomsday scenarios.
“Canadian bank capital structure and management is typically, historically – and remains – conservative. Banks are cash flow and balance sheet machines,” Brian Belski, chief investment strategist at BMO Capital Markets, said in an interview.
Count Mr. Belski among contrarians who are looking beyond the current influx of bad news. In a note this week, he spelled out the case for “overweighting” financials – or owning a bigger slice than is currently reflected in the sector’s 30-per-cent weighting within S&P/TSX Composite Index.
Bank stocks, which are down an average of 23 per cent over the past 18 months and trading near two-year lows, are especially attractive within the sector, given their low valuations and high dividends.
He believes that sentiment toward the stocks is at extremely low levels, rivalling the early days of the COVID-19 pandemic in 2020. The largest financial exchange-traded funds have experienced net outflows over the past two weeks, offering evidence that banks are unpopular with investors and already reflecting a lot of bad news.
To be clear, Canadian banks are facing crummy conditions.
In their most recent quarterly results, released last month, the banks reported that impaired loans increased by 12 per cent, on average, as rising borrowing costs chip away at the ability of businesses and consumers to meet their debt obligations.
Loan growth is slowing to a trickle: Canadian residential mortgages, for example, didn’t rise at all between the first quarter and second quarter.
Meanwhile, expenses at the biggest banks have been increasing at a double-digit clip for the past two quarters, as compensation rises to offset inflation. Gabriel Dechaine, an analyst at National Bank Financial, expects the banks could respond with cost-cutting efforts – translation: layoffs – that could easily drive restructuring charges above $3-billion across the sector if all banks participate.
And this week, the Office of the Superintendent of Financial Institutions, the banking regulator, announced that it is increasing the domestic stability buffer – the capital that banks must hold as protection against an economic downturn. Analysts expect the increase will weigh on bank profitability.
The good news? Well, there isn’t any, other than share prices are in the dumps and valuations are well below the historical norms, offering the tantalizing possibility that bank stocks will eventually rise from these discounted levels.
For valuations, Mr. Belski uses a composite metric based on ratios for price-to-earnings, price-to-book, price-to-sales and dividend yields, which shows that bank stocks are considerably cheaper than the historical average for data going back more than 30 years.
The best bets, according to Mr. Belski: Focus on banks with diversified balance sheets and strong U.S. platforms.
U.S. exposure looked like trouble earlier this year, when regional banks there were struggling with declining deposits and threatened to drag down the broader sector. But he believes that the United States offers attractive growth prospects, and any comparisons to the financial crisis of 2008-09 are deeply flawed.
“There is no sign of a credit crisis. There is no sign of contagion,” Mr. Belski said.
He didn’t recommend individual stocks in his capacity as a strategist with big-picture views on investing. But Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal have large U.S. footprints and are well diversified beyond, say, Canadian residential mortgages.
The dividend yields on these three banks range from 4.4 per cent for RBC, to 4.9 per cent for TD and 5 per cent for BMO. Those are sizable payouts for investors while they wait for better news, perhaps in the form of defeated inflation or less economic uncertainty.
Even large restructuring charges could help turn around sentiment toward bank stocks. During the last round of significant restructuring charges, in 2016, the banks that showed the biggest improvement in efficiency – their expenses fell the most relative to revenues – enjoyed the best rallies, according to Mr. Dechaine.
No one is suggesting that the banks’ challenges are over. But the sector has an impressive track record of rewarding investors who take advantage of downturns.
“All the bad news is already out there,” Mr. Belski said. “Remember, no one can collect on the end-of-the-world trade.”
TORONTO – Canada Goose Holdings Inc. says it has signed a deal that will result in the creation of its first eyewear collection.
The deal announced on Thursday by the Toronto-based luxury apparel company comes in the form of an exclusive, long-term global licensing agreement with Marchon Eyewear Inc.
The terms and value of the agreement were not disclosed, but Marchon produces eyewear for brands including Lacoste, Nike, Calvin Klein, Ferragamo, Longchamp and Zeiss.
Marchon plans to roll out both sunglasses and optical wear under the Canada Goose name next spring, starting in North America.
Canada Goose says the eyewear will be sold through optical retailers, department stores, Canada Goose shops and its website.
Canada Goose CEO Dani Reiss told The Canadian Press in August that he envisioned his company eventually expanding into eyewear and luggage.
This report by The Canadian Press was first published Sept. 19, 2024.
Almost seven years since news broke of an alleged conspiracy to fix the price of packaged bread across Canada, the saga isn’t over: the Competition Bureau continues to investigate the companies that may have been involved, and two class-action lawsuits continue to work their way through the courts.
Here’s a timeline of key events in the bread price-fixing case.
Oct. 31, 2017: The Competition Bureau says it’s investigating allegations of bread price-fixing and that it was granted search warrants in the case. Several grocers confirm they are co-operating in the probe.
Dec. 19, 2017: Loblaw and George Weston say they participated in an “industry-wide price-fixing arrangement” to raise the price of packaged bread. The companies say they have been co-operating in the Competition Bureau’s investigation since March 2015, when they self-reported to the bureau upon discovering anti-competitive behaviour, and are receiving immunity from prosecution. They announce they are offering $25 gift cards to customers amid the ongoing investigation into alleged bread price-fixing.
Jan. 31, 2018: In court documents, the Competition Bureau says at least $1.50 was added to the price of a loaf of bread between about 2001 and 2016.
Dec. 20, 2019: A class-action lawsuit in a Quebec court against multiple grocers and food companies is certified against a number of companies allegedly involved in bread price-fixing, including Loblaw, George Weston, Metro, Sobeys, Walmart Canada, Canada Bread and Giant Tiger (which have all denied involvement, except for Loblaw and George Weston, which later settled with the plaintiffs).
Dec. 31, 2021: A class-action lawsuit in an Ontario court covering all Canadian residents except those in Quebec who bought packaged bread from a company named in the suit is certified against roughly the same group of companies.
June 21, 2023: Bakery giant Canada Bread Co. is fined $50 million after pleading guilty to four counts of price-fixing under the Competition Act as part of the Competition Bureau’s ongoing investigation.
Oct. 25 2023: Canada Bread files a statement of defence in the Ontario class action denying participating in the alleged conspiracy and saying any anti-competitive behaviour it participated in was at the direction and to the benefit of its then-majority owner Maple Leaf Foods, which is not a defendant in the case (neither is its current owner Grupo Bimbo). Maple Leaf calls Canada Bread’s accusations “baseless.”
Dec. 20, 2023: Metro files new documents in the Ontario class action accusing Loblaw and its parent company George Weston of conspiring to implicate it in the alleged scheme, denying involvement. Sobeys has made a similar claim. The two companies deny the allegations.
July 25, 2024: Loblaw and George Weston say they agreed to pay a combined $500 million to settle both the Ontario and Quebec class-action lawsuits. Loblaw’s share of the settlement includes a $96-million credit for the gift cards it gave out years earlier.
Sept. 12, 2024: Canada Bread files new documents in Ontario court as part of the class action, claiming Maple Leaf used it as a “shield” to avoid liability in the alleged scheme. Maple Leaf was a majority shareholder of Canada Bread until 2014, and the company claims it’s liable for any price-fixing activity. Maple Leaf refutes the claims.
This report by The Canadian Press was first published Sept. 19, 2024.
Companies in this story: (TSX:L, TSX:MFI, TSX:MRU, TSX:EMP.A, TSX:WN)
TORONTO – TD Bank Group, which is mired in a money laundering scandal in the U.S., says chief executive Bharat Masrani will retire next year.
Masrani, who will retire officially on April 10, 2025, says the bank’s, “anti-money laundering challenges,” took place on his watch and he takes full responsibility.
The bank named Raymond Chun, TD’s group head, Canadian personal banking, as his successor.
As part of a transition plan, Chun will become chief operating officer on Nov. 1 before taking over the top job when Masrani steps down at the bank’s annual meeting next year.
TD also announced that Riaz Ahmed, group head, wholesale banking and president and CEO of TD Securities, will retire at the end of January 2025.
TD has taken billions in charges related to ongoing U.S. investigations into the failure of its anti-money laundering program.
This report by The Canadian Press was first published Sept. 19, 2024.
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