RBC Says Hedge Funds Targeting Canadian Banks

Oct 14 2011 | 10:49am ET

Hedge funds are shorting Canadian banks, convinced their shares—which have held up well this year compared to their global counterparts—are due for a fall.

“The hedge fund community has shown an increased interest in shorting Canadian bank shares of late,” RBC Dominion Securities, the brokerage unit of Royal Bank of Canada, said in a research note this week. “While we recognize downside risks in a recessionary scenario, we ultimately believe Canadian banks will hold up relatively better than other sectors in the event of a downturn.”

Shares in Canada’s five biggest banks—RBC, Canadian Imperial Bank of Commerce, TD, Bank of Nova Scotia and Bank of Montreal—trade at some of the highest price-earnings multiples in the industry.

Canada’s strong economy carried the banks through the financial crisis, but foreign investors are now looking at the country’s rising household debt and wondering what will happen if the housing market cools.

“The key investment concern from U.S.-based investors is the Canadian consumer’s health, and the level of indebtedness in the mortgage market,” Cheryl Pate, a New York-based analyst with Morgan Stanley, which has a “neutral” rating on Canada’s banking industry, told the Globe and Mail. “We are looking broadly for a slowdown, but I would say it’s a slowdown to a normalized level.”

The Globe points out that although Canadian banks may look expensive compared to their global counterparts, other measures show their valuations are par for the course: the banks now trade at an average of 11.5 times earnings, versus an average of 11 for the past decade. 

“The Canadian banks are great companies with very durable business models, but we would be careful with the idea that the Canadian banks are immune to global events,” Rob Wessel, managing partner at Hamilton Capital, a Toronto-based fund manager specializing in financial services stocks, told the paper.


In Depth

Why Ponzi Schemes Work: An In-Depth Look At The Allen Stanford Fraud

Dec 21 2014 | 10:30am ET

Texan Allen Stanford first appeared on the radars of financial regulators in 1997...

Lifestyle

Hedgie Funds US Squash Program

Dec 24 2014 | 8:46am ET

Squash, anyone?

Guest Contributor

EidoSearch’s Top Three Market Projections For 2015

Dec 23 2014 | 4:03am ET

It is that time of year again when prognosticators make their big market calls for...

 

Sponsored Content

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

December 2014 Cover

Futures 2014 person of the year

Jeff Sprecher was simply looking for a platform to trade energies when launching ICE 14 years ago but it has grown to reach the pinnacle of both the listed futures and equities world.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.