Heading into the year, sentiment on Canadian banks was at its lowest level since the ill-conceived "Great White Short" of early 2013.
Though the group managed to dispel much of the pessimism by posting solid first-quarter earnings reports, worries about the avenues for growth – in light of the highly indebted Canadian consumer and downturn in oil prices – persist.
In Odlum Brown's post-mortem of the earnings season for the Big Six banks, director of investment research Murray Leith describes the results in one word: resilient.
The drop-off in oil prices, which was billed as a sizeable headwind for the Canadian financials, actually proved beneficial, according to Mr. Leith.
"Contrary to conventional wisdom, the big drop in oil prices had a positive influence on results, as (1) the associated drop in the Canadian dollar added translation gains on foreign operations; and (2) the increased volatility that came with the big drop in oil prices helped the trading businesses," he said.
The plethora of share issuances from energy companies looking to bolster their balance sheets suggests that the collapse in crude has continued to be a boon for the banks early in the year.
Cenovus Energy Inc., Encana Corp., Secure Energy Services Inc., Baytex Energy Corp., Crew Energy Inc., Raging River Exploration Inc., ARC Resources Ltd., and Rock Energy Inc. have all tapped the capital markets to raise cash this year.
Earlier this month, The Globe's Niall McGee observed that equity issuances were up sharply year to date relative to 2013 and 2014, providing fat fees for investment banking divisions.
At some point, however, investors' appetite for energy issuances will diminish, and these offerings will wane. But this doesn't look to be a second-quarter story.
The Big Six were down a little more than 10 per cent on the year at the end of January, on average, but rallied ahead of earnings season in February as the price of oil gained. The average bank has pared roughly half of its January losses. All currently trade at a discount to their historical price-to-earnings ratios.
Recently, Gluskin Sheff + Associates chief economist and strategist David Rosenberg reiterated his positive stance on the group.
The banks are "trading at their lowest multiples relative to the overall market in 13 years and with a dividend yield of 4 per cent, which is a record when benchmarked against a 1.5 per cent yield on the 10-year government bond," he wrote.
But American investors haven't shied away from betting against Royal Bank of Canada, the nation's largest bank by market capitalization. On the New York Stock Exchange, the number of shares of Royal Bank that have been sold short reached 28.2 million by mid-March, or 2 per cent of its float, which is more than double the amount of short positions at the beginning of the year.
Bank-specific problems, like Bank of Nova Scotia's flatlining foreign operations, remain, and low net interest margins, thanks to the flat yield curve, continue to crimp profitability. In addition, loan loss provisions have limited cause or scope to decline any further. These big-picture issues, however, are well-known, and have likely priced into these equities for some time.
The consensus among analysts is for the Big Six to grow earnings by 3 per cent in 2015, an estimate which Mr. Leith says may be on the high side unless oil prices rebound. While the macroeconomic backdrop is undoubtedly softening, the near-term profit outlook for Canada's biggest banks does not look to have been derailed.
(The writer of this post owns shares in TD Bank.)