The Globe and Mail reports in its Wednesday edition that something is weighing on Canadian bank stocks. The Globe's Scott Barlow writes that the Canadian economy is approaching the end of its credit cycle after a long period during which consumers gorged on mortgage debt and drove housing prices higher. This is no doubt part of the reason bank stocks are under pressure. The flattening yield curve may also be playing a role. Banks prefer a steep yield curve because it makes basic lending more profitable. Historically, however, bank stocks have shown little or no correlation with the yield curve, likely because their businesses are so diversified. Neither the credit cycle nor the yield curve is sufficient to explain the extreme degree of pessimism the banks have endured. Bank of Nova Scotia analyst Sumit Malhotra says that banks have not been this out of favour since 2007. "The divergence between fundamental trends and share price valuation is the most significant we have seen since 2007, a scary reference point given the 'late cycle' concerns that have weighed on the stocks over the past few months," Mr. Malhotra said in a report.
Morgan Stanley analyst Ken Zerbe said Tuesday that "winter is coming" for U.S. banks.
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