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Royal Bank of Canada (RY $241.74)
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Toronto-Dominion Bank (The) (TD $142.77)
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Bank of Nova Scotia (The) (BNS $103.43)
Q: Hello:
Canadian banks have had a great run. Valuations have markedly changed more than I would have predicted. At what valuation might you trim into this strength? What headwinds could be foreseen?
Many thanks.
Canadian banks have had a great run. Valuations have markedly changed more than I would have predicted. At what valuation might you trim into this strength? What headwinds could be foreseen?
Many thanks.
5i Research Answer:
While each investor has unique investor preferences and risk tolerances, we would consider trimming if the big banks push much beyond 15X forward earnings, which most are nearing, and at these current valuations, the margin of safety begins to shrink for what are ultimately slow-growth businesses. On headwinds, the key risks are a softer Canadian economy driving higher credit losses, an unemployment spike while rates stay elevated, and continued pressure on mortgage renewals. Trade tensions and elevated consumer leverage are also worth watching. None of these are new concerns, but they become more meaningful when paying a full multiple for the group.