The following is an excerpt from Canaccord Genuity’s Morning Coffee newsletter.
Canadian banks are up 4% and 9% over the past month and past three months, respectively, easily outpacing the S&P/TSX.
Credit Suisse Group (
NYSE: CS,
Stock Forum) attributes the recent strength to:
Better than expected Q3/13 results;
Lack of negative news related to the Canadian housing market, which was a major source of concern earlier in the year;
Declining short interest;
Discounted valuation notably vs Canadian lifecos and U.S. regional banks;
And, Credit Suisse believes, sentiment that 2015 could be a rebound year for EPS growth.
Credit Suisse highlights that the Canadian banks are currently trading at a 12% forward P/E discount to the Canadian lifecos, which compares to an in-line historical valuation.
Although they have a positive view on the lifecos –
Manulife Financial Corp. (
TSX: T.MFC,
Stock Forum) and
Sun Life Financial Inc. (
TSX: T.SLF,
Stock Forum) – they believe the valuation argument has been tilted in favour of the banks.
Slower growth has been priced into the stocks and the lack of a near-term credit event, in their view, have rendered the banks attractive.
Outside of Canada, the relative discount to U.S. regional banks also looks compelling, in Credit Suisse’s view. Although the valuation gap has narrowed, the 23% relative forward P/E discount of the Canadian banks is well above the 13% historical average discount.
Another way to own the Canadian banks, on an enhanced yield basis, is through
BMO Covered Call Canadian Banks ETF (
TSX: T.ZWB,
Stock Forum).
This ETF holds the big six Canadian banks at essentially the same weights and writes covered call options to enhance yield.
At Tuesday’s close, ZWB had a yield of 5.25%.