Are Canadian banks still worth the investment?

Canadian banks have been a solid investment since the financial crisis.

That’s because banks escaped both the brunt of the recession and a lot of its regulatory aftermath, says Michael Peterson, managing principal and portfolio manager for International, European and Global Value Strategies at Pzena Investment Management in New York. He manages the Renaissance Global Value Fund.

At the same time, other global banking sectors have been volatile since they had to dramatically tighten standards, introduce new regulations, and deal with litigation issues that arose from the recession.

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However, if you’re now looking for more significant returns, Peterson suggests looking at other stocks that are trading at a discount.

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“Our style is to invest in institutions of any kind where the stock is trading at a cheap valuation, relative to what we regard as fundamental earning power,” he says.

“The reason we get to buy a stock at what seems to be an inappropriately low price is that something’s wrong today, and investors have sold down and avoided that stock because of that current issue.”

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This includes large-cap institutions from across the globe.

“They’re names that would be household names, whether in the United States or Europe, that were at least fairly involved in the crisis itself,” explains Peterson. “Now that the crisis has passed, what’s important is [even though] they’re bearing the brunt of the regulatory changes that are underway,” they have an upside.

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For example, Swiss banks reacted dramatically to the banking crisis. In fact, the country “introduced capital requirements early on that seemed to put its banks at a disadvantage. There were also, worldwide, very low rates of interest and activity [following the recession], which reduced the earning power of…banks in Switzerland,” of which a large portion are private institutions.

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Today, regulatory and economic trends are still depressing earnings. But Peterson has exposure to Swiss banks because he finds they have a great deal of value and are under earning their potential.

He adds, “We’d regard Canadian banks having been an extremely prudent choice for any investor, but on a go forward basis they’re probably less interesting.”

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