Kim Shannon - The Outlook for Canadian Banks
Kim Shannon, portfolio manager and founder of Sionna Investment Managers, which manages mutual funds for Brandes Investment Partners, discusses her outlook and views on the Canadian bank sector with Dan Richards, of ClientInsights.ca
Dan Richards: Kim, can we start today by talking about Canadian Banks. Can we begin by talking about how Canadian banks have performed over the last little while.
Kim Shannon: They've had quite a volatile ride. We've had them be quite challenged in '08, and then have a pretty phoenomenal recovery, and a couple of the banks are back at the highs that they were in 2007, and back in 2007 we had blue skies as far as the eyes could see for banking.
We don't have that future forecast today.
DR: The end of June, looking at the public data on the funds you manage, you had about a 10%-age weighting in Canadian banks, and that's just over half of the weight of banks in the index. Can you talk about the rationale for that.
KS: We think that the Canadian banks are expensive today. They have shown up incredibly well in our model for most of the last 25 years, but recently, they are not showing up well in the models, so intrinsically they are not inexpensively any longer, like they have been in the past.
And that's largely the reason we are underweight. Our concern is that they'll be dead money for investors, basically earning you a dividend yield at best, and our job is to create wealth for investors.
DR: And could you elaborate when you "they show up in your model, as attractive in the past, not as attractive today?"
KS: Our model identifies which stocks are truly cheap in the universe, and traditionally banks have been inexpensive relative to the other opportunities, that of stocks in the universe. Today, they are not showing up in the universe of 140 cheapest stocks, which means that they're expensive relative to their traditional earnings power. On top of that we're concerned that the earnings power is likely to be subpar what we've seen in the last decade.
DR: Now, the one bank that you do own that's roughly at the index weight would be Bank of Nova Scotia. So it sounds like in an environment where you're not crazy about banks, that's one bank that you don't mind. Can you talk a little about that?
KS: Well, that one shows up as relatively less expensive than the rest overall. But, its also an incredibly well managed bank, and its always had a better than average efficiency ratios, its had an incredibly strong culture that survived new CEOs coming and going into the role. For a future focus, we really like the fact that they're international in nature, and they actually have true potential for real growth because they are embedded in emerging markets that are under-banked. The rest of the banks in Canada are primarily located in Canada, with some entities mostly in the United States, and those are very mature banking environments, and so any growth they can enjoy means they're having to steal it from a competitor.
DR: Kim, final question. Over the last little while, we've seen some earnings disappointments by some Canadian banks. Do you want to comment on that?
KS: We've been talking to investors for quite some time about what we believe to be ongoing pressures on Return on Equity and earnings and so we're not surprised that there's been a stumble here because that fits in with our analysis that it will be very hard to enjoy the strong earnings that we saw for the middle part of this past decade in banking.
DR: Kim, thank you very much.
[CSSBUTTON target="http://www.clientinsights.ca" color="23238E" textcolor="ffffff"]Access many more Dan Richards' interviews at ClientInsights.ca[/CSSBUTTON]Kim Shannon - The Outlook for Canadian Banks
DR: Kim, can we start today by talking about Canadian Banks. Can we begin by talking about how Canadian banks have performed over the last little while.
KS: They've had quite a volatile ride. We've had them be quite challenged in '08, and then have a pretty phoenomenal recovery, and a couple of the banks are back at the highs that they were in 2007, and back in 2007 we had blue skies as far as the eyes could see for banking.
We don't have that future forecast today.
DR: The end of June, looking at the public data on the funds you manage, you had about a 10%-age weighting in Canadian banks, and that's just over half of the weight of banks in the index. Can you talk about the rationale for that.
KS: We think that the Canadian banks are expensive today. They have shown up incredibly well in our model for most of the last 25 years, but recently, they are not showing up well in the models, so intrinsically they are not inexpensively any longer, like they have been in the past.
And that's largely the reason we are underweight. Our concern is that they'll be dead money for investors, basically earning you a dividend yield at best, and our job is to create wealth for investors.
DR: And could you elaborate when you "they show up in your model, as attractive in the past, not as attractive today?"
KS: Our model identifies which stocks are truly cheap in the universe, and traditionally banks have been inexpensive relative to the other opportunities, that of stocks in the universe. Today, they are not showing up in the universe of 140 cheapest stocks, which means that they're expensive relative to their traditional earnings power. On top of that we're concerned that the earnings power is likely to be subpar what we've seen in the last decade.
DR: Now, the one bank that you do own that's roughly at the index weight would be Bank of Nova Scotia. So it sounds like in an environment where you're not crazy about banks, that's one bank that you don't mind. Can you talk a little about that?
KS: Well, that one shows up as relatively less expensive than the rest overall. But, its also an incredibly well managed bank, and its always had a better than average efficiency ratios, its had an incredibly strong culture that survived new CEOs coming and going into the role. For a future focus, we really like the fact that they're international in nature, and they actually have true potential for real growth because they are embedded in emerging markets that are under-banked. The rest of the banks in Canada are primarily located in Canada, with some entities mostly in the United States, and those are very mature banking environments, and so any growth they can enjoy means they're having to steal it from a competitor.
DR: Kim, final question. Over the last little while, we've seen some earnings disappointments by some Canadian banks. Do you want to comment on that?
KS: We've been talking to investors for quite some time about what we believe to be ongoing pressures on Return on Equity and earnings and so we're not surprised that there's been a stumble here because that fits in with our analysis that it will be very hard to enjoy the strong earnings that we saw for the middle part of this past decade in banking.
DR: Kim, thank you very much.
