Canadian banks are good buys

Canadian bank are worth investing in.

So says Stephen Carlin, vice president and senior portfolio manager of Canadian equities at CIBC Asset Management. He manages the Renaissance Canadian Dividend Fund.

Though bank profits have been slipping this year due to sluggish loan growth, he says that doesn’t mean Canadian financial institutions are losing value. In fact, Carlin finds our banks are still generating significant ROEs and excess capital.

He predicts the banking sector “could grow its earnings in the mid-to-high single digit rates.”

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Carlin says, “When we [consider] the growth in the [sector] along with the attractive valuations, we still think…Canadian banks [have] reasonable value,” says Carlin.

He adds, “When I compare the Canadian banking sector to other regions—to U.S. money-centered banks, for example—it looks quite compelling from an earnings and valuation perspective.”

Carlin disagrees that Canada’s banks are currently expensive. “I think Canadian banks are attractively valued. We continue to see some modest earnings growth, so we still see good investment potential in the Canadian banking sector looking forward,” he says.

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Further, he says there hasn’t been a major shift in the value of the Canadian dollar relative to the U.S. dollar. But he does point out a weaker Canadian dollar can benefit homegrown companies that export products, while it hurts businesses that export into Canada.

For instance, Carlin says energy companies that produce in Canada have become more cost-competitive. That’s because “they’re selling products in U.S. dollars so that’s a benefit.”

Carlin adds a weaker dollar also marginally boosts business in the industrial space. “Once again, if you have products you’re manufacturing in Canada and selling abroad in U.S. dollars, that would give you a benefit.”

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In contrast, a falling dollar could negatively impact retail companies, which import. However, Carlin says most Canadian companies are well positioned to maneuver through challenging environments, especially given “the [minor] shift in the Canadian dollar won’t dramatically change the outlook for companies.”

That said, Carlin says he does “keep a sharp eye on currencies to make sure we don’t have any potential negative impacts [on his] investment outlook.”

He aims to buy stocks trading below their intrinsic values, though he always uses a long-term focus so he “can maneuver through shorter-term choppy markets, which [aren’t] necessary in the best of interests of long-term value creation.”

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