Raquel Castiel can easily list off the things that bother her about Canadian banks. Their earnings may be going nowhere in the first half of 2010. They have major regulatory risks hanging over them for most of the year. Their dividends are stuck in neutral.
And she likes them anyway. "We've been bullish on the banks for a while, based on their really solid retail operations," the Standard Life Investments Inc. vice-president and portfolio manager said in a telephone interview from Montreal.
Ms. Castiel said that the biggest risk facing Canadian banking stocks is global regulatory uncertainty, as international regulators mull new requirements for the world's banks, aimed at avoiding a repeat of the 2008-09 financial crisis. But, "it's going to be worse for banks in Europe and the United States than Canadian banks," she said.
In the meantime, banks almost certainly won't be willing to raise dividends "until we see regulatory clarity," because they won't know what sort of capital requirements they will have under the new regulations.
That means we're probably looking at late 2010 or early 2011 before the banks resume dividend increases - something none of them has done since the middle of 2008.
Still, she noted, there's no longer fear that any of the banks would have to cut dividends, a serious concern during the crisis. And with bank payouts yielding better than 4 per cent, "the dividend yield is still very attractive."
The valuations on Canadian banks, on the other hand, have become a bit less attractive as the markets have recovered. Ms. Castiel said that on price-to-book and price-to-earnings metrics, "they're back to their average," both on an absolute basis and relative to the S&P/TSX composite index.
That means price appreciation will largely be driven by earnings growth. By the end of the year, she said, Canadian bank profits could be growing at a 10-to-15-per-cent annual pace - and dividends could be in for 10-per-cent increases.