Since valuations of Canadian banks already reflect the challenging operating environment, their shares stand to make healthy gains in 2013 barring bouts of risk aversion or markets anticipating a recession.
That?s the view of Andre-Philippe Hardy, analyst at RBC Capital Markets, who believes the banks could generate total returns between 10% and 20% next year.
Mr. Hardy thinks returns will likely be at the low end of that range if the operating environment remains unchanged, and at the higher end with even modest improvement.
?We believe that a weaker housing market could negatively impact sentiment toward Canadian bank shares but a modestly weaker housing market (prices down 5-15%) on its own would not have a meaningful impact on bank profitability, in our view, beyond what is already expected (i.e., weaker loan growth and low but no longer improving credit costs),? the analyst said in a note to clients.
?We believe that Canadian employment growth is much more important to Canadian banks? domestic growth and profitability outlook than the housing market on its own,? he added.
Despite the group not having meaningful direct exposure to Europe?s most troubled countries, Mr. Hardy wouldn?t be surprised to see broader market volatility stemming from issues in Europe impacting the banks for some time.
?Signs of stress for European countries and banks have improved in recent months, but remain elevated,? he said.
The analyst?s favourite bank stocks are Toronto-Dominion Bank, Bank of Nova Scotia and Canadian Western Bank.
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