Rebound in Large Canadian Banks?

“I love maple syrup. I love maple syrup on pancakes. I love it on pizza. And I take maple syrup and put a little bit in my hair when I’ve had a rough week. What do you think holds it up, slick? – Vince Vaughn, Wedding Crashers

The two biggest Canadian Banks by market cap, Toronto-Dominion Bank (TD) and Royal Bank of Canada (RY), have had a rough go of it of late. Over the past three months, they are down -12.6% and -13.7% respectively, while the S&P TSX 60 (large cap Canadian index), is up a little more than 3% over the same period. What gives?

The biggest issue is the dramatic drop in Oil prices over the past 6 months. According to CBC News, the big Canadian Banks get up to 20% of their revenues through investment and corporate banking services with Oil and Gas companies. There’s also concern about the downstream effect, and that extended low Oil prices could lead to loan defaults from industry and personal mortgage defaults from idle workers. Add this to the fact that mortgage growth in the region is already slowing.

The thing is, the large cap Canadian index itself is already heavily sensitive to Energy. Have these two stocks, that are down about 16% relative to the index over the past 3 months, been beaten down too far? With Oil prices possibly finding a bit of footing here over the past couple of weeks, is this a good entry point? Let’s get some historical perspective.

We first looked at the current price trends in both Crude Oil AND the stock prices of RBC and TD, to find times historically where both have traded in a similar fashion. We found only two with mathematical similarity: Fall of 2008 and Spring of 2011. We know what happened in 2008, and in 2011 RBC was up 14% in the next three months and TD was up 4%.

To get results with more teeth, we then looked at the current 3 month price trends in both stocks, whose trading patterns are highly correlated over that time, in two ways. First comparing them to large cap global banks historically, and then to their own histories only to get a gauge for how the stocks usually respond in similar environments. The reaction has been consistent.

Royal Bank of Canada (RY)

Chart #1:
· We found 98 similar instances, dating back to 1990, comparing the current 3 month price trend to large cap global banks historically
· The stock is up 67.3% of the time

Chart #2:
· We found 21 instances of the current 3 month price trend in RBC’s history.
· The stock is up 66.7% of the time

Toronto-Dominion Bank (TD)

Chart #1:
· We found 98 similar instances comparing the current 3 month price trend to large cap global banks historically
· The stock is up 67.3% of the time

Chart #2:
· We found 17 instances of the current 3 month price trend in TD’s history.
· The stock is up 70.6% of the time

The statistics look promising for BMO and others as well. Give us a shout if you’d like some additional details.

Have a great week!