The Financial Post reports in its Friday edition that it was another good year for Canadian bank stocks in 2016, with the Big Six gaining about 25 per cent.
The Post's Jonathan Ratner writes that Barclays analyst John Aiken says while there does appear to be more upside potential for the sector in 2017, it needs to come from earnings growth, not just multiple expansion. He says, "There was a significant change in the multiples that investors were willing to pay for Canadian bank earnings at the start of 2016 versus the start of 2017."
He notes that Canadian banks enjoyed multiple expansion over the past year.
That is one reason why Mr. Aiken does not think the current enthusiasm boosting U.S. banks stocks does not mean much for Canadian banks.
He estimates that changing earnings expectations accounted for only about a fifth of share price gains for the sector, while multiple expansion was responsible for the other 80 per cent.
Fortunately, earnings growth expectations for 2017 are higher than they were a year ago, but at 4.4 per cent on average, that is hardly an impressive number.
Mr. Aiken notes the market appears to be pricing in a more optimistic outlook than what is reflected in analyst forecasts.
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