{"id":7405,"date":"2023-07-20T19:00:00","date_gmt":"2023-07-21T00:00:00","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/are-low-bank-valuations-a-reason-to-buy-the-sector\/"},"modified":"2023-11-01T10:38:41","modified_gmt":"2023-11-01T14:38:41","slug":"are-low-bank-valuations-a-reason-to-buy-the-sector","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/are-low-bank-valuations-a-reason-to-buy-the-sector","title":{"rendered":"Are low bank valuations a reason to buy the sector?"},"content":{"rendered":"

Banks have historically performed well when interest rates rise. When they do rise, banks are quick to pass on interest rate increases to borrowers, but slow to pass them on to depositors. Thus, their net interest margins tend to increase. <\/p>

In fact, in late June, UK Chancellor of the Exchequer Jeremy Hunt met with bank bosses to discuss how reluctant the banks had been to pass on higher returns to savers. Britain\u2019s four largest banks were then offering rates of less than 1.35 percent on easy access accounts, where close to two-thirds of household deposits are held, at a time the Bank of England (BoE) had raised the bank rate to 4.5 percent, according to the Treasury Select Committee. <\/p>

With the delay between raising borrowing costs and deposit rates, banks\u2019 profitability can improve, as long as the lending cycle remains benign and loan loss provisions restrained. This can lead to bank stocks outperforming. <\/p>

However, it has not been the case this year, of course, due to the failure of three U.S. regional banks, and the collapse of Credit Suisse in Europe which all rattled the sector. U.S. bank stocks have underperformed the broader market year to date. European banks have barely outperformed, while UK banks, widely perceived as having avoided these issues, have held up better, largely thanks to international banks performing well as banks catering solely to the domestic market struggled. <\/p>

Performance of local bank indexes relative to their broad domestic markets <\/h3>
\"Performance

The chart shows the performance of four regional Bank indexes relative to their broad domestic market, all rebased to 100 for ease of comparison. They all performed very poorly in March after the U.S. regional banking crisis erupted. U.S. and Canadian banks haven\u2019t clawed back all the lost relative performance, though in the case of the U.S., it is partly because the S&P 500 Tech sector has performed so well, lifting the overall market. European banks sold off due to the Credit Suisse collapse, recovered, and have now performed slightly better than the broad European market. UK banks, seen as isolated from the banking crisis issue, performed better and outperformed the FTSE All-Share Index. <\/p>