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A Royal Bank of Canada sign in downtown Toronto. (MARK BLINCH/REUTERS)
A Royal Bank of Canada sign in downtown Toronto. (MARK BLINCH/REUTERS)

What's driving the bank-stock surge Add to ...

So much for betting against Canadian bank stocks.

Each of Canada’s five largest banks hit 52-week highs on Tuesday, with all of them, except Canadian Imperial Bank of Commerce, touching record peaks.

Earlier this month, Royal Bank of Canada became the first Canadian bank to crack the $100-billion mark in market capitalization, a further sign of how strongly the sector has rebounded from the depths of the financial crisis.

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The share price surge comes just months after a U.S. hedge fund manager drew headlines by warning that Canada’s financial sector was headed for trouble.

Instead of faltering, bank stocks went on a tear thanks to an unexpected lift in the Canadian housing market, slow but steady growth in the global economy and record earnings performances.

Some money managers believe the shares have further to rise.

“I like bank stocks,” said Paul Harris, portfolio manager at Avenue Investment Management, which owns shares in Toronto-Dominion Bank and RBC.

“I think they are very cheap on any fundamentals you look at these days,” Mr. Harris added.

Bank of Montreal shares have risen 21 per cent so far this year, while RBC is up 17 per cent. TD has gained 14 per cent and Bank of Nova Scotia and CIBC have advanced about 10 per cent each. In comparison, the S&P/TSX composite index is up only about 8 per cent.

Most of the gains in bank stocks have been achieved since late June, as the strength of the housing market surpassed expectations. A buoyant real estate market helps to drive mortgage lending as well as borrowing for renovations and other housing-related expenses.

The recent surge into record territory comes after the Bank of Canada said last week that it was pushing out its timelines for raising interest rates, a move that encourages loan growth by increasing confidence that rates will remain lower for longer.

Strong profits have added to the case for bank stocks. Last quarter, BMO, CIBC and National Bank of Canada each posted their best-ever earnings, while TD recorded a record profit for its Canadian personal and commercial banking unit.

The banks’ juicy dividend yields, which range from 3.5 to about 4.5 per cent, are another selling point, particularly at a time when other market sectors, such as mining, are in a slump.

“The banks are always a good place to hide when there is uncertainty in the marketplace,” said Barclays analyst John Aiken.

This week, Credit Suisse raised its price targets on all the major Canadian banks, while Macquarie Securities analyst Sumit Malhotra boosted his target price-to-earnings ratio for the sector last week.

Citigroup analyst Stefan Nedialkov cautions that the runup in bank stocks may be more about market sentiment than earnings performance. He notes that the recent gains have been largely the result of investors’ willingness to pay more for a dollar of earnings, rather than upgrades to earnings estimates.

The sector’s advance hasn’t changed the opinions of Vijai Mohan, a San Francisco hedge fund manager, who went public earlier this year with his “short Canada” strategy designed to produce a profit from the distress he saw ahead for the banks and the Canadian dollar.

He is sticking by his thesis that the country’s real estate market is headed for a crisis that will drag down both the financial sector and the currency.

It has been a costly bet, however. During the third quarter, his Hyphen Partners LP fund posted a 4.8-per-cent loss.

While the fall in housing prices he predicted hasn’t happened and bank earnings are expected to rise, Mr. Mohan is still sour on Canada.

“We still have a significant negative position on the [Canadian] banks and the currency,” he said in an interview Tuesday.

“Ultimately my bet is a bet on real estate as it relates to the banks,” he said, calling continually rising home prices “an unsustainable situation.”

“Prices in any market don’t go up forever,“ he said. “My belief remains you still have the ingredients for a downdraft at some point. But I have to admit it won’t happen today.”

With files from reporter Sean Silcoff in Ottawa

Follow on Twitter: @BrendaBouw

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