Canadian bank stocks on fire, despite downgrades

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Investors in Canadian bank stocks could not care less about the recent rating downgrades to the Big Six.

After Moody's Investors Service downgraded Royal Bank of Canada last year, and then cut the debt rating for five of the country's six biggest banks last week, citing concerns about about consumer debt levels and a risk of a drop in housing prices, the banks are now trading near or above their post-crisis peaks, with some nearing their all-time highs.

The support is felt at smaller outfits, too, with Canadian Western Bank creeping close to the high it set in December 2007.

For a taste of just how strong the demand for banks is, Royal Bank of Canada now trades at $62.67, just a smidgeon shy of its all-time peak set in April 2010; National Bank of Canada is flirting with $80 per share once again; and Bank of Montreal, now trading at $62.96, is approaching its post-crisis high of about $65 per share.

Despite the warnings, investors are gung-ho for these stocks because the banks keep churning out strong profits – even when nobody expects them to. The CEOs keep warning that this is such a tough operating environment for financial institutions, but RBC's profit of $7.5-billion last year was its highest ever. The same goes for Bank of Nova Scotia, which put up a record net income of $6.5-billion.

Then there is growing retail investor demand for stocks. As the Globe pointed out last week, the fear that held them back from dipping their toes in equities appears to be abating, driving them to buy things like index funds and broad exchange traded funds. Because the banks make up such a big chunk of the Canadian market, anyone who buys an index fund is putting about a quarter of their money in banks, whether they know it or not.

On top of that, Canadian resources are still being shunned by investors, cutting out about 40 per cent of the Canadian market for those who are really timid. Of the remaining 60 per cent, the banks comprise a big slice of the pie, so it only makes sense that more money is flowing into their shares.