OTTAWA: Canadian banks can support higher multiples than investors are willing to provide, and U.S. and international investors who do not own these stocks should consider adding exposure, RBC Capital Markets says. The market “seems to fret” each time Canadian bank multiples push beyond 12x forward earnings, but these multiples should be three or four points higher, said RBC Capital Markets analyst Matthew Barasch.
Although there are headwinds such as housing, slowing overall growth in the country and the leverage of the Canadian consumer, Canada’s banks have stared down other pressures in the last six decades and “have managed to stickhandle their way through these various crises with nary a dividend cut,” he said in a note to clients on Monday. “In fact, Canadian banks are the only sector/subsector in North America to generate a better total return than Warren Buffet’s Berkshire Hathaway over the past 20- and 25-years, which in our view speaks to the powerful and consistent compounding mechanisms they have been… In other words, based on their history of success, we have a high degree of confidence that they will manage their way through current headwinds,” Barasch said in the note.
The RBC Capital Markets analyst acknowledged that long-held views by investors will be hard to “de-trench,” but compared to the broader indices and other sectors Canadian banks have exceeded the vast majority of comparables on a variety of different metrics over the past 35-plus years. Canada’s banks have generated the highest returns across the North American spectrum “with consistently lower earnings volatility, higher dividend growth, higher dividend yields overall, and higher ROEs than most other equity investment options in North America (and we suspect worldwide),” Barasch added.
