(Bloomberg) -- Investors in Canadian financial stocks are poised to benefit from Donald Trump’s return to Washington with an agenda to cut taxes and regulations, analysts and strategists say.
Some of them believe Canada’s biggest banks are still undervalued, even after a 30% rally in the past year, and say the shares will keep rising with help from anticipated strength in the US economy.
Shares of the largest banks in the US, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., surged last week after Trump triumphed and his Republican allies took control of the Senate. The KBW Bank Index ended the week up 8.4%, its biggest weekly jump in a year.
Canadian banks rose only 2% last week, and they’ve badly lagged the KBW over the past year — but may be due for a catchup. “The big winner going forward is going be financials in Canada” because of the success American banks have already seen, said Brian Belski, chief investment strategist at BMO Capital Markets.
Financial shares are a major driver for Canada’s benchmark equity gauge, the S&P/TSX Composite Index. The six largest banks make up about 20% of the index and other financial stocks, including Brookfield Corp., represent another 12%. Financials are an even bigger weight in the benchmark than energy, mining and materials stocks, which are around 30% combined.
National Bank of Canada banking analyst Gabriel Dechaine said that among Canadian banks, Bank of Montreal and Royal Bank of Canada are the biggest winners from a Trump victory.
Bank of Montreal investors will have to look past what may be another weak report in the fourth quarter, with higher provisions for credit losses and weak commercial loan growth, Dechaine said in a note to clients. “But definitely the perception that the worst will be behind them is a likely driver of the stock,” he said.
BMO expanded its US footprint with its acquisition of Bank of the West, which closed in early 2023 and added nearly 1.8 million customers as well as 500 branches and offices.
Another possible winner from a stronger US economy is Bank of Nova Scotia, Dechaine said, which struck a deal in August to take a 14.9% stake in Cleveland-based KeyCorp.
Toronto-Dominion Bank would have been on the list but the bulk of TD’s US operations face growth caps imposed by the US Justice Department and financial regulators because of its failures on money laundering.
Analysts at ratings firm DBRS Morningstar wrote that they don’t expect the Big Six Canadian banks’ credit fundamentals to be significantly affected by the lower corporate taxes and deregulation anticipated during a second Trump presidency. But they agree Bank of Montreal and Royal Bank stand to benefit the most.
Trump’s win may boost capital markets activity, and his plans to bring more manufacturing production back to the US are potentially positive for commercial lending, DBRS said. Those are lines of business in which BMO and RBC have a solid US presence.
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