Canadian Banks are the mainstays in many a portfolio for very good reasons: they have profitable franchises, pay a solid dividend that typically increases every year and have high returns on equity. As a recent cover story in the Report on Business points out, the recent performance of the banks is nothing short of spectacular: Since January 1, 2003, Royal Bank (TSX: RY) is up 83%, TD Bank (TSX: TD) is up 107%, Bank of Nova Scotia (TSX: BNS) is up 93%, CIBC is up 113% and Bank of Montreal (TSX: BMO) posted total returns of 71%.
I have recently been wondering how long the good times can last, especially given the fact that the earnings growth has been driven largely by improvements in the credit cycle. The banks are also at the high end of their historical valuation trading at an average of 2.8 times book value.
I think it is time to turn cautious on the banks (which means that I will be holding tight but not adding to my positions) when people like Ed Clark (chief of TD Bank) are quoted saying “These are very unusual conditions, so it’s hard to get yourself tossing and turning in the middle of the night. So what you toss and turn on is, how long can this keep on going?”
Full Disclosure: TD Bank (TSX: TD) and Bank of Nova Scotia (TSX: BNS) are among my top ten holdings.