For all the talk about how strong Canada's economy was through the financial crisis, it's taken some time for investors to put their money back into our banks. For proof, take a look at Royal Bank of Canada's stock chart, which shows that the stock traded in a range and never really gained traction for most of 2010.
But with first-quarter earnings season almost over, (Bank of Nova Scotia is the last to report tomorrow morning) there is a flurry of speculation about how much potential the Canadian banks have this year. In fact, "2011 is shaping up to be year when consensus chases actual results," noted Canaccord Genuity analyst Mario Mendonca.
The first quarter changed everything. So far four of the banks blew out consensus expectations and the fifth, BMO, was in line with estimates. Plus, the banks performed so well for different reasons, including loan growth, better trading and underwriting revenues as well as lower credit loss provisions. Now that bank dividend hikes are back on the table, there's even more momentum behind these institutions.
For that reason, Canaccord has hiked its expected bank price-to-earnings multiple to 13 times.
To put that in context, the Big Six usually trade a group multiple of 12.0 to 12.5 times earnings. Last fiscal year they finished at 12.0 times.
However, from 2003 to 2007, consensus estimates jumped 3 per cent to 10 per cent every year and the group P/E multiple was always at or above 13 times, Mr. Mendonca noted. After such a long lull and finally some real earnings strength, he is willing to bet that level of performance will come back, at least for the year.
Tim Kiladze