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Canadian bank stocks tumble as global sell-off spreads

The Toronto-Dominion Centre and surrounding Financial District buildings, in Toronto.

Ian Willms/The Globe and Mail

Canada's big banks have long been sheltered from many of the global economy's biggest troubles, but a dramatic sell-off on Tuesday suggested that this might not be the case any longer.

Canadian bank stocks were down more than 3.5 per cent during the day, marking the biggest decline for the group since August, 2009, when stock markets were emerging fitfully from the global financial crisis.

Stocks recovered some lost ground later in the day, but over all, Canadian bank stocks have tumbled more than 7 per cent this year.

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While that is relatively mild next to the double-digit declines among U.S. and European bank stocks, Tuesday's downturn suggests investors are starting to lump the big banks together with their global peers.

"It's hard to separate the global story from the Canada-only story right now," said Peter Routledge, an analyst at National Bank Financial Inc.

The backdrop to the day's market turbulence certainly pointed to indiscriminate alarm among investors. European stocks fell 1.8 per cent and Japanese stocks fell 5.4 per cent. The Toronto Stock Exchange tumbled 2 per cent.

The yield on the 10-year U.S. Treasury bond continued its descent, falling to a one-year low of 1.73 per cent. That is down sharply from a 2.3-per-cent yield at the start of the year, suggesting little confidence in the Federal Reserve's goal of raising interest rates, or the health of the economy.

Among commodities, crude oil tumbled 7 per cent, nearing the 12-year low it touched in January.

For Canadian banks, concerns about their exposure to a weak domestic economy, indebted consumers, a precarious housing market and the depressed energy sector will no doubt be hot topics when they discuss their fiscal first-quarter results, starting later this month.

But these concerns have been simmering for more than a year, without any indications of a deterioration in financial performance or stress on Canadian households.

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Indeed, analysts have been pointing to a slowdown in profit growth among the big banks rather than a sharp reversal.

Darko Mihelic, an analyst at RBC Dominion Securities Inc., estimated that profits among the big banks will rise 5 per cent over last year, on a per-share basis, and their provision for credit losses will nudge only slightly higher from the previous quarter.

What's more, he expects Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank will increase their quarterly dividends when they report.

The higher payouts could increase the allure of the stocks and would certainly reflect confidence among bank executives.

Globally, though, bank stocks have been having a rough start to the year, and for a number of reasons.

The global economic outlook is deteriorating, not only in China but in the United States as well, leading to uncertainly about how central bankers will respond. Bank stocks tend to reflect the economic outlook, given what unemployment rates can do to consumer default rates.

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But they can also react to shrinking spreads between their borrowing costs and lending rates, and there appears to be little relief when interest rates remain so low and bond yields keep falling.

"The Fed is unlikely to raise rates in March, and may only move twice this year, given tighter financial conditions and slower growth," Sal Guatieri, senior economist at BMO Nesbitt Burns Inc., said in a recent note.

The Bank of Canada recently held its overnight rate at 0.5 per cent, while the yield on the Government of Canada five-year bond is only 15 basis points (or 0.15 percentage points) higher.

However, analysts note that at least Canadian banks have one thing going for them: The stocks are cheap, relative to profits.

Meny Grauman, an analyst at Cormark Securities Inc., said the big banks trade at 9.5 times estimated per-share profits, which is 14 per cent below the 10-year historical average of 11.1 times earnings.

Still, even he is cautious: "While many may view current valuations as cheap, we caution against the overly optimistic view, given the significant downside risks facing the Canadian banking sector and the Canadian economy as a whole, which we believe are still under-appreciated by the markets," he said in a note.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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