Canaccord analyst sees ‘increasingly appealing dividend yield proposition’ for Canadian banks

Every day, we bring you a compilation of the latest research and analysis by The Globe and Mail's market strategist, Scott Barlow, that he has found while browsing the internet.

According to Stéfane Marion, the chief economist and strategist at National Bank, there will be instability in the North American stock market in the future.

We predict that the S&P 500 will continue to decline in value in the future because we are unsure about the theory that the economy will have a gradual slowdown, and we believe that the economy has been in a technical recession for three quarters since the beginning of 2024. In the past, the U.S. economy has experienced a recession 5 to 16 months after the yield curve becomes inverted. It has now been 10 months since the yield curve inverted. Additionally, we are worried because the S&P 500 is currently being traded at a high price compared to its future earnings, which has never been seen before when the yield curve is inverted. The S&P/TSX is facing difficulties in the third quarter, as all sectors except for consumer staples and energy have experienced a decline. Gold stocks within the materials sector have been greatly impacted by the recent strengthening of the USD and the increase in real interest rates. Banks and consumer discretionary stocks have also been performing poorly. These setbacks are due to concerns about Canadian households being heavily affected by higher interest rates, as well as the rapid slowdown of the Chinese economy. Canadian banks are being valued with consideration to the worry that many homeowners may default on their payments, which would decrease the value of mortgages held by the banks. However, this scenario is not currently our main expectation.

Canaccord analyst Martin Roberge provided a condensed overview of the financial performance statements released by Canadian banks thus far.

It is still early in the process of setting aside funds for potential loan losses. RBC had better-than-expected results, while TD did not meet expectations, marking the start of the banks' earnings season last week. The growth in loan originations has slowed down compared to last year, and the costs of hiring staff are causing expenses to rise for the banks. BMO and BNS also provided similar insights into the state of the banking industry in Canada, with both missing their targets. The Chief Risk Officer of RBC, Graeme Hepworth, mentioned that the bank predicts a decline in credit trends for retail as the job market weakens and higher interest rates affect more clients. In fact, the four banks have allocated $2.7 billion for potential loan losses in this quarter. If we assume that revenue growth remains the same in the next year, we estimate that the top six Canadian banks will need to increase their provisions by $15 billion to reach the peak levels seen during the pandemic. However, there are some mitigating factors, particularly related to cost-cutting measures. For example, RBC stated that the number of full-time equivalent employees has decreased by 1% compared to the previous quarter, with an additional reduction of 1% to 2% expected next quarter. Nonetheless, we believe that cost-cutting alone will not lead to a sustainable increase in profits. Therefore, we believe it is too early to upgrade the banks, but we will remain neutral considering the potential for higher dividend yields in the group.

The Financial Times has stated that international investors are swiftly departing from China.

In August, Chinese stocks were sold by foreign investors in a historic amount of $12 billion. This happened because the measures taken by Beijing to support the economy were not effective enough in addressing concerns about the slow growth of the world's second-largest economy and the deteriorating property market crisis in China. To make matters worse, recent data shows that China's manufacturing sector has contracted for five consecutive months. Stephen Innes, managing partner at SPI Asset Management, explains that investors are particularly worried about China's GDP and whether policymakers will be able to achieve their 5 percent growth target. This concern is directly linked to the property market, as its negative impact on GDP could be 1 percentage point or even more.

Investors from other countries unload Chinese shares rapidly in the month of August, breaking previous records. This information was reported by the Financial Times, which requires a paid subscription to access.

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