Views on investing in domestic and foreign bank stocks

Financial companies in the US and Europe have been making headlines over the past week—causing volatility in Canadian bank stock prices. We want to share some insight into the investment selection process for stocks in our portfolios.

When CIBC Asset Management considers investment decisions in domestic and foreign banks or financial companies, we approach the investment selection and due diligence process the same way we do for non-financial related stocks.

Due diligence and the investment selection process

First, we focus on the risk-reward profile of a stock and take appropriately weighted risk-controlled positions relative to the volatility and potential downside risk in the security. We always consider the market expectations versus our own views of what is likely to happen. We also consider what is priced into a particular security.

When considering whether to invest in a bank stock, we evaluate their business mix, assess their capital position and risk profile, and make a judgement on the strength of the management team. We have a very positive view on Canadian banks.

Canadian banks and financials tend to have solid Returns on Equity, very strong capital positions and operate in one of the strongest regulatory frameworks in the world. Canadian banks also tend to be defensive relative to US names and are trading at a discount to their long-term intrinsic value.

Considering how the stock is positioned within the industry and the economy

The economic and business backdrop is also very supportive of long-term structural growth for Canadian banks. This is because they operate in a very regulated and resilient space with significant growth opportunities from acquisitions in the US and abroad.

We feel Canadian banks are in a better economic position than US regional banks. This is because US banks will start to face regulatory challenges due to higher capital and regulatory requirements.

Understanding how company holdings factor into investment decisions

There is a wider long-term issue in the US that will unfold over time where quantitative tightening will drain deposits from the US banking system. Banks need to prepare for this risk by holding more liquid and short-term assets such as cash or near-cash securities.

This effect will be magnified for US regional banks (versus larger US universal banks) because there will likely be an increase in deposit flows from US regional banks to the larger US universal banks over time.

We believe in and continue to take an active management approach, and invest in high quality companies with strong management teams and solid long-term fundamentals.

CIBC Asset Management is committed to providing market insights and best-in-class research to help you find the right investment solutions. If you'd like to discuss this update in more detail or have questions about your investment portfolios, please get in touch with your advisor any time.