Insurers are outshining banks in the current high-rate environment
Joe Sirdevan of Galibier Capital Management says insurance companies generally benefit from rising interest rates, earning higher investment income from their bond portfolios
- Featuring: Joe Sirdevan
- March 14, 2023 March 14, 2023
(Runtime: 5:00. Read the audio transcript.)
The failures of Silicon Valley Bank and Signature Bank have spooked many investors. And while banking in the U.S. is in a state of flux, the sector is much more stable in Canada.
“The Canadian banks are much, much bigger than Silicon Valley Bank and have a diversified customer base, which massively reduces their risk of forced capital raises,” said Joe Sirdevan, CEO of Toronto-based Galibier Capital Management. “As well, they are highly regulated, and they are run much more conservatively.”
Sirdevan said rapid interest rate increases combined with poor management decisions put both California-based Silicon Valley Bank and New York-based Signature Bank into dire straits.
“The run on some individual banks in the U.S. is somewhat due to these factors,” he said. “The actions of monetary and fiscal authorities during Covid are leading to the outcomes we are seeing today.”
He said in the case of Silicon Valley Bank, deposits ballooned during Covid. Bank officials lent what they could and invested the balance in bonds. As rates rose and the economy slowed, bond prices fell, leaving the bank short when clients recalled their deposits.
Sirdevan described the situation south of the border as a short-term aberration, and specific to U.S. regional banks.
“We expect a return to normalcy in the near term, and that the long-term prospects for the financial services companies remains strong,” he said.
In Canada, the insurance industry in particular has been a good investment over the last year: “In terms of how insurers look versus the banks, I would say they are looking increasingly attractive,” he said.
Companies such as Manulife Financial Corp. and Intact Financial Corp. are far outshining banks in the current economic environment, he said.
“Since December 31 of 2021, Intact’s total return has been 24% and Manulife’s has been about 18%, both well ahead of the negative 1.5% of the TSX, and both well ahead of the banks with Royal Bank of Canada up 7%, being the top performer of the banks,” Sirdevan said in late February.
He praised Manulife’s relatively low 8x price-to-earnings ratio, and said that Intact Financial has excellent growth prospects from its core business, coupled with its proven mergers and acquisition strategy.
Among Canadian bank stocks, there are deals to be found, he said. On a P/E basis, the banks appear cheaper than insurance companies.
“Looking at the average bank P/E, it’s around 9.1 times, versus the insurers at 10.4 times,” he said. “In terms of the cheapest multiples, it looks like Laurentian Bank is the cheapest bank, at around 6.9 times forward EPS, followed by Canadian Western Bank at 7.5 times consensus EPS, and Bank of Nova Scotia at 8.6 times consensus.”
There are still risks, Sirdevan said.
“The biggest risk is that interest-rate increases trigger a recession, and this impacts loan and mortgage defaults, and possibly even a further stock market pullback,” he said. “The banks who are lenders are much more at risk in this scenario than the insurance companies are. And [the Office of the Superintendent of Financial Institutions] has been tightening capital standards for the banks in anticipation of this. So, we prefer the insurance companies’ exposure to the banks right now.”
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.
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