Our blog of last week (see prior post “What would the great Hugh Brown say about bank share performance charts today?” July 12-13) made its way down to Nova Scotia, and Hugh Brown found my email address and sent back a reply, along with a table to back up his words.
Here’s his response:
Mark: Thanks for your kind comments in your blog of July 12, 2013.
You have a good memory from Burns Fry days. Yes, I am still more than alive enjoying life in Nova Scotia (from May through October) and yes, still following banks stocks (as a hobby). My friend at BMO Capital Markets, John Reucassel is the expert on this subject.
I have attached a table we continue to publish which shows absolute and relative performance of Canadian bank shares over the last 42 plus years. As indicated and as you know, Canadian bank shares have been good absolute and relative performers over almost any longer period you look at. However, there have always been leaders and laggards (thus the need for expert analysts). For example, TD was the winning bank in the 1990’s and the losing bank in the 2000 to 2009 period. We note in the commentary that the annual return spread between individual banks is likely to widen again in future years. Currently CIBC is challenged. Overall many of the tailwinds that have driven past Canadian bank share price outperformance (i.e. increasing consumer debt leverage, low loss ratios, falling interest rates and tax rates, etc.) appear to be turning into headwinds which suggest future investment returns from bank shares may be more modest. However, relatively low Canadian bank share valuation ratios appear to recognize this challenging outlook. Versus their yield competitors (like bonds, utilities, REITs, pipelines, etc.) bank shares look like good value.
In essence, Hugh’s saying that we shouldn’t write-off any of the 5 banks at this point, and argues that trading in and out of names from time to time based upon the work of people like Mr. Reucassel is still the way to go.
(disclosure: we likely own all of the Big 5’s securities, either directly or indirectly via mutual funds or other externally managed funds)