Outlook bright for Canadian banks

Canadian bank stocks shot up about 20% in 2013.

And they remain attractive despite their high values, says Craig Jerusalim, portfolio manager on the Canadian Equity team at CIBC Asset Management. He co-manages the Renaissance Diversified Income Fund.

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“When I look across the traditional yield sector—which includes REITs, utilities, telecoms, pipelines and the financial sector—banks are offering the best combination of valuation, yield, profitability and growth…Banks still [provide]…earnings growth, plus 3% yields,” he adds.

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What’s more, Jerusalim isn’t shaken by the prospect of rising interest rates. That’s because banks will likely shine in such an environment.

“Unlike most other interest rate-sensitive sectors, bank margins traditionally would expand” and that, he notes, is because “margins between what the bank borrows at and what they lend [could] widen.” It’s likely rate increases would also be driven by an improving economy, which is another plus for banks.

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“We’ve done a tremendous amount of stress testing…on the banking sector, specifically around what would happen if interest rates rose and the Canadian housing market suffered a setback,” says Jerusalim. “Even under the most stringent scenarios…we still don’t see [rising rates] as a capital event for banks.” He predicts dividends will also be safe.

Bad news for gold bugs

Gold stocks likely won’t shine in 2014, says Jerusalim, since they’ve been pummelled over the past few years.

Gold companies have “a horrible track record of destroying shareholder value by making untimely acquisitions and allowing costs to run away from them,” he adds. “While valuations have come down over the past year, there could be further to go as companies reassess their reserves based on lower commodity prices.”

Read: 2013’s commodity exodus to continue

For many businesses, this could result in substantial write-offs, adds Jerusalim. Though this process could positively impact the commodities sector in the long run, he suggests investors stick with other high-quality stocks that have attractive cash flows and good values.

Even when gold prices start to dip and look attractive, help clients stay on track.

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