Paul Bagnell

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After a week of market carnage, a question on the minds of many Canadian investors is whether or not now is time to increase their exposure – and perhaps increase it significantly – to Canadian bank stocks.

After all, by the time Thursday’s market demolition was over, with the S&P TSX composite index suffering its worst day since 1940, the bank stocks looked like they were on sale, with price-earnings multiples collapsed to levels rarely seen.

The bank stocks typically trade between 10 and 12 times expected earnings. Those P/E multiples now range from 6.2 (CIBC) to 9.6 (Royal Bank) The S&P TSX Banks Index , which is banks only – no lifecos – is now at its lowest level in four years.

But as I spoke to investing professionals through the course of last week, their view was that investors should think twice about taking new positions in Canadian bank stocks. There are too many headwinds to profit growth, they said.

Bryden Teich, a portfolio manager at Avenue Investment Management, said Friday he and his colleagues were buying beaten down dividend-payers on Thursday, but that buying did not include the Canadian banks.  Avenue had reduced exposure to the bank stock some time ago, and has seen no reason since then to increase exposure.

Earlier in the week, Philip Petursson, ​chief investment strategist at Manulife Investment Management, shared a similar view. 

Petursson, who co-hosted The Street last week, said he would not recommend stepped-up weightings in the bank stocks. He cited the recent rate cuts by the Bank of Canada and the U.S. Federal Reserve – with more cuts widely expected – as adding a significant obstacle to the bank’s profit-growth prospects.

Robert Colangelo, senior vice president of Canadian Banking Financial Institutions at DBRS Morningstar, said he was already forecasting the banks’ revenue and profit growth to slow down in 2020.  The coronavirus crisis, he said, is significant enough that profit declines over the next couple of quarters are possible.

“It will get worse before it gets better,” Colangelo, who covers the banks from a debt-issuance perspective, said in a phone interview Friday of the coronavirus spread, and the blow it will deliver to the Canadian and U.S. economies.

He forecasts slower revenue growth and a stepped-up emphasis on cost control at the banks.

Loan losses had already started rising at most of the banks, and he predicted this rise would become steeper. Two banks that bear watching, he noted, are Bank of Montreal and Bank of Nova Scotia – both with relatively higher loan exposure to the oil and gas sector. (Much of Scotia’s exposure to the sector is to state-owned energy companies operating in Latin America, and thus more secure than loans to private oil and gas borrowers).

But Colangelo, like other analysts, stressed the diversity of the banks’ lending books, including to sectors most vulnerable to a coronavirus shock, like manufacturing and energy.

“The lending taps are still on,” Colangelo said. "They will get through this.”