Canadian Bank Valuation Vulnerable to Negative Economic News - Desjardins

They've led the charge during the recent rally, but given their fast rising valuations over the past few months, Canada's banks look ready for a breather, says Michael Goldberg, Desjardins Securities analyst.

"Banks are now valued at pre-Lehman levels, in terms in trailing P/E multiples and relative yields," he said in a note to clients.

"This potentially makes them riskier and more susceptible to any economic event that deviates from the positive trend."

Since Mar. 9, the banks have climbed 69% compared to the broader TSX benchmark that has risen 36%. As a group, the banks are now trading just 5% shy of the level they traded on Sept 12, 2008, the last trading day before Lehman Brothers filed for bankruptcy. In late February, the banks were trading 46% below the pre-Lehman mark.

Mr. Goldberg attributed the recent rise in bank stocks to the Bank of Canada's commitment to maintain short-term interest rates at 0.25% at least until 2010.

In addition, positive economic news has helped banks rebound, in part by calming investor concerns surrounding potential dividend cuts.

But with the economic recovery still in doubt, Mr. Goldberg told clients further upside is expected to be limited and banks could be vulnerable to negative news flow.

"Increased caution towards the banks seems warranted in the face of this increased risk," he wrote.

Comments

[SJMDESIGN LTD:]

Long position on canadain banks is still very good .
Canadian may take a breather due to banks south of our border which are not in good shape and they have tendency to drag us down slightly.
Our banks have escaped most of the brunt compared to us banks and no question we look good globally and we are rebounding very nicely.

Jul 03 09:36 AM