Shares of major Canadian banks have been under pressure amid concern about the Oct. 26 referendum on the new national constitution.
The Toronto Stock Exchange's bank index has stumbled nearly 5% this week and is now 7% below its Aug. 31 level and 16.8% below its 52-week high.
Additional pressure on the stocks came Wednesday, when Canadian banks raised their prime rate a record two percentage points to 8.25%. The action came in response to efforts by the Bank of Canada to defend the Canadian dollar by raising money market interest rates.
A Surprising Departure
The rate increases were surprising because Canadian rates had been falling with U.S. rates for the past two years.
After the turmoil of the past few days, Canadian Bank shares leveled off Thursday.
In afternoon trading in Toronto, Bank of Montreal was unchanged at $43.50, National Bank of Canada was unchanged at $7.625, Bank of Nova Scotia was up 25 cents to $21.625, Toronto-Dominion Bank was unchanged at $7.375, Canadian Imperial Bank of Commerce was unchanged at $27.75, and Royal Bank of Canada was up 12.5 cents to $22.75.
"The banks were beaten up very badly, but appear to be recovering," said Thomas D. McCandless, who follows Canadian institutions for Goldman, Sachs & Co.
Mr. McCandless said there are growing similarities between the economies and banking industries of the United States and Canada, including the performance of bank stocks. He regards Canadian bank stocks as moderately undervalued.
Canadian bank stock price-to-earnings multiples "have tended to trade in line with those in the U.S. market," he said.
Since late 1987, when Canada began experiencing a more harsh recession than the United States, the Canadian bank multiples have been "below those of their U.S. counterparts."
Despite the bankruptcy of Toronto-based Olympia & York Developments Ltd., which has clouded the earnings outlook this year, Canadian banks are beginning to show "the prospect of recovering earnings in 1993," Mr. McCandless said.
Realty Loans Are Main Problem
As in the United States, real estate loans remain the principal problem, while other areas of lending are improving.
Kevin R. Choquette, an analyst in Toronto for First Boston Corp., noted that Bank of Montreal's net nonperforming loans on Canadian real estate rose to 19.9% from 14.5% during the third fiscal quarter, which ended July 31.
But Mr. Choquette has a "buy" recommendation on the stock, citing a 10.7% quarterly increase in other income, major productivity gains, and good control of noninterest expenses.
Mr. McCandless rates Bank of Montreal and Royal Bank of Canada as "moderate market outperformers." He has "market performer," or neutral, ratings on Bank of Nova Scotia, Canadian Imperial Bank of Commerce, and Toronto-Dominion Bank.
A |Sell' for National Bank
Mr. Choquette has a "sell" rating on National Bank of Canada, which has a troubled loan portfolio and which reported a loss of $1 per share for the most recent quarter, versus earnings of 25 cents a year earlier. Mr. McCandless does not follow the bank.
National Bank of Canada also startled the market by halving its common dividend to 40 cents a share from 80 cents.
Mr. McCandless likes Canadian banks generally because their nationwide branch system provides "a powerful deposit-gathering mechanism" and the "inherently high savings rate in Canada, combined with large core funding bases, provides considerable financial underpinning" for the institutions.Sharp DropsPercentage change in Canadianbank stocks during SeptemberBank ofNova Scotia -9.0%Royal Bankof Canada -9.0%TorontoDominion Bank -7.3%CanadianImperial Bank -6.7%National Bankof Canada -6.2%Bank ofMontreal -5.7% Source: First Boston Corp.