(Shaken in the United States by the sudden bankruptcy of Silicon Valley Bank, which forced federal intervention, the banking sector is still strong in Canada, despite some pessimistic notes.) Canadian banks, with the exception of Scotia, signed a third consecutive negative trading session on Monday. In the case of CIBC, TD, BMO and Laurentian, the negative streak now stretches to six. The pessimism goes beyond the fears related to the recent setbacks of the American banks, but these setbacks accentuate the nervousness.
Canadian banking valuations were already reflecting a mild recession before Silicon Valley Bank’s troubles made headlines last week.
There are always reasons to worry in the market, regardless of the time of year, says BMO strategist Stéphane Rochon.
“Canadian banks are among the most conservative in the world and certainly more conservative than US banks. And they are very well capitalized. In Canada, deposits are guaranteed by the federal government. There is no better guarantee,” he says.
Not only should the failure of Silicon Valley Bank not have significant negative implications for our banks, believes Meny Grauman, analyst at Scotia Capital, but this crisis should in fact be seen as further proof of the model’s effectiveness. Canadian banking sector, dominated by a small number of large diversified banks.
“The big lesson to be learned from the collapse of Silicon Valley Bank is that the American banking sector must become more Canadian,” he argues.
“And that’s what we’re likely to see anyway – whether regulators agree or not – as deposits increasingly shift to larger institutions,” he said.
On the face of it, RBC analyst Darko Mihelic believes the failure of Silicon Valley Bank is idiosyncratic and unlikely to cause contagion to the financial system as a whole.
His colleague Mike Rizvanovic, of the firm Keefe, Bruyette & Woods, also tries to be reassuring. “While the collapse of Silicon Valley Bank has sparked widespread fears in global markets, Canadian banks are largely immune to the kind of risk that led to the failure of Silicon Valley Bank. »
To justify his point, Mike Rizvanovic highlights in particular the “very diversified” clientele of Canadian banks, a “modest” exposure to high-risk technology companies, a smaller increase in deposits since the start of the pandemic (compared to American banks) , and higher loan-to-deposit ratios that point to a more favorable funding mix.
He insists that tech-related lending is weak for the country’s big six banks. At CIBC, for example, which provides the most detailed information on its exposure to technology, he believes that start-up high-risk accounts for approximately 1% of total deposits.
Therefore, he says, any weakness in the stock price of the big six banks linked to problems at Silicon Valley Bank and other less diversified US lenders is not warranted.
Opportunities in the United States
For his part, Darko Mihelic thinks that the perceived risk in the market could turn into an opportunity.
“For example, some consumers and business customers in California may be impacted by loss of cash and reduced access to credit, and may even pose a risk to the California economy with knock-on effects. coaching. But on the other hand, it may create opportunities for some banks in the region, including Canadian banks with operations in California,” he said in a note released Monday.
“It may be too soon for BMO to react aggressively [pour embaucher des banquiers ou recruter des clients], as it only recently completed the acquisition of Bank of the West, but that remains to be seen. »
He also wonders if the situation will help or hurt TD in its proposed acquisition of First Horizon, whose stock plunged on Monday, leaving doubts hanging over the closing of the transaction. “We will continue to assume that TD is committed to the transaction and that the acquisition will ultimately be approved until the facts suggest otherwise, but we recognize the uncertainty of the situation which could cause some volatility in the TD stock. »
Darko Mihelic says he does not see any positive catalysts in the short term for the securities of the country’s financial institutions and suggests a certain caution with regard to the shares of Canadian banks. “Problems can reveal themselves slowly,” he warns.
Some investors may be tempted to look for “defensive” securities in the sector, and Darko Mihelic thinks in particular of the National Bank, whose capital ratios are high, liquidity solid and exposure to the United States less . “But since its valuation is relatively high, we suggest caution with all banks at this time,” he said.
Meny Grauman does not see the signal of a deeper financial crisis looming on the horizon, either in the United States or in Canada. “The measures announced by the Fed on Sunday will help ensure that this remains the case,” he said in a report sent to clients on Monday.
“That doesn’t mean, however, that what happened on Friday won’t have longer-term consequences, both for the U.S. banking and tech sectors, or that the rising interest rate environment won’t pose challenges.” to banks of all sizes over the coming quarters,” he warns.