Why the rally in Canada's bank stocks could be losing steam
Despite the recent rally in Canada’s Big Six bank stocks, now is not the time for investors to jump in, according to one of Bay Street’s biggest bears on the sector.
Nigel D’Souza, financial services analyst with Veritas Investment Research, says credit risks will likely remain elevated as Canadian lenders face the fastest rate of commercial and consumer insolvencies since the financial crisis.
“If you have a widespread increase across multiple sectors in credit risks and across the entire geographic landscape of Canada, that’s more indicative of late-cycle risks and maybe a potential recession risk on the horizon – which we’re not forecasting – but I think that risk is increasing,” D’Souza told BNN Bloomberg’s Catherine Murray on Tuesday.
“If that occurs and it’s more a cyclical downturn, there’s not much the banks can do to avoid it, because it’s a macro factor that they can’t control.”
D’Souza said that while credit risks in 2015 and 2016 were concentrated in Western Canada’s oil and gas sector, this time around insolvencies have risen across most of the country’s provinces and in multiple sectors – including manufacturing, transportation, retail, automotive and health services.
He added that investors should buy Canadian bank stocks when credit losses peak, which D’Souza expects to occur by late 2020 or early 2021.
“You don’t need a significant hit to earnings driven by loan losses. It’s simply concerns of the elevated credit risk, slower economic growth, and multiple contractions that will result in underperformance of the bank shares,” D’Souza said.
“Keep in mind management teams at the banks themselves have said they expect credit losses to continue to normalize. So if you think credit losses will continue to go up, you want to buy bank stocks in the future, not right now.”
In March, D’Souza recommended investors to lighten up on Canadian lenders amid expectations that credit losses would pile up and potentially trigger a sharp fall in share prices in the country’s big banks.