(September 20) – Merrill Lynch is urging caution on bank stocks.
Merrill observes that Canadian banks have rallied strongly, both recently, up more than 10%, and in the year-to-date, up 35%. This action has cut the discount Canadian banks are trading at relative to global rivals by about half, and Merrill says that the rest of that discount should be expunged in the long run.
However the brokerage firm warns that in recent weeks Canadian bank stocks have diverged from the global trading in the sector. “While we agree the relative discount should be erased as Canadian bank return on equity converges with international standards, we would exhibit caution accumulating the Canadian stocks are ‘bucking’ international trends.”
Merrill also notes that there’s speculation that the Financial Services Bill C-38 will receive a quick passage, leading to subsequent mergers, and this is cited as one reason for the sudden jump in Canadian bank stocks. “While this may or may not be true, we believe the highly-political process around any subsequent merger announcements is likely a post-election issue, probably next summer. If not a marathon, the process is at least a middle-distance race — we do not believe it is a sprint.”
Its top picks in the sector remain CIBC and Royal.
-IE Staff