Wessel is thoughtfully optimistic about the banking sector, particularly in Canada, despite what recently happened, primarily in the United States.
He noted that what happened to Silicon Valley Bank was “a very idiosyncratic set of circumstances hitting a very idiosyncratic company”. It primarily served the technology sector at a time when it was dropping from its pandemic high and needed its deposits to meet payroll. The bank had doubled its growth, so bought longer-dated securities just before interest rates rapidly rose. It shouldered significant unrealized losses, so had to sell many securities at a loss. That prompted an electronic run on the bank and consumer confidence was shaken as other small banks struggled, too.
While Wessel figured that Canadian banks with U.S. operations – like TD, BMO, CIBC, and RBC – could end the first quarter with significant deposits resulting from that shake-out, he noted there could also be a regulatory reaction from it that could slow growth over the medium-term. Meanwhile, the Canadian banks have rebalanced some, though he noted they have not fully recovered since the market is still pricing in a recession.
The big six Canadian banks are still offering an average dividend yield of 4.9%. But he said Bloomberg has reported that they are still treading at less than nine times forward 2024 earnings, which is a very low multiple, even as it looks like the market is pricing in a hard landing.
“One thing we always say is history has been very kind to long-term investors who bought the Canadian banks at less than nine times earnings,” said Wessel. “So, if you’re a long-term investor, it doesn’t mean that they won’t fall from here. That could be influenced by changes in the macro environment. But, if the investors can stick it out, these are very, very strong, resilient companies. And, so far, they’re not showing any signs of any significant deterioration. In fact, they’re not showing any signs of deterioration for the most part.”