(Bloomberg) -- The latest round of earnings has turned Bank of Nova Scotia’s analysts and portfolio strategists optimistic on the outlook for Canadian bank stocks.
That marks a shift for the analysts, which had a negative view of the nation’s banks since late 2022 as the industry dealt with the impact of interest-rate hikes, slowing mortgage growth and tighter capital rules. But that backdrop has since shifted, with the Bank of Canada now cutting interest rates and earnings coming in stronger than expected.
“That trade has paid off,” Scotiabank’s Meny Grauman and Felix Fang wrote in a note Tuesday, referring to their previously bearish view of bank stocks, which drove them to favor insurers instead. “But in our view has now played out as central banks become more dovish, and bank capital rules stabilize (at least for now).”
In a separate note Tuesday, Scotia Capital portfolio strategist Hugo Ste-Marie and his team said “the time has come” to close underweight positions in bank stocks.
Many of Canada’s biggest banks performed better than expected in the third quarter as those including Royal Bank of Canada and Canadian Imperial Bank of Commerce set aside less cash for potentially sour loans. National Bank of Canada and Scotiabank also came ahead of analyst expectations on stronger local banking performance.
The results weren’t uniformly strong, however. The Bank of Montreal and Toronto-Dominion Bank fell short of estimates as the former booked higher provisions for credit losses, while TD took a $2.6 billion hit related to a US investigation into anti-money laundering controls.
But the stocks as a group have rebounded strongly since the Bank of Canada started cutting interest rates in June, with a S&P/TSX bank index rising some 11% since late that month. The nation’s central bank has eased policy twice already and is expected to cut its benchmark rate by another quarter percentage point on Wednesday.
Scotiabank’s analysts expect the moves will improve pace of loan growth, slow provisions for credit losses and alleviate concerns around a mortgage renewal wave.
The bank’s portfolio strategists also noted that the BMO Equal Weight Banks Index ETF, which tracks Canadian bank performance, broke above the C$37 mark that it had stalled at during the previous two years.
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