Big Banks in Canada

Big Banks in Canada

When trying to understand the difference between the price of a stock and the value of a company it is helpful to think of actual industries and companies where this may be happening. One of the largest such sectors in Canada is our banks.

Strong consistent profits and performance of the Big Six banks has been a hallmark of this sector for many decades. The year 2020, however, has proven itself to be a difficult one for our blue-chip banks with the average price of stocks declining by roughly 40% in March, and even at the end of October they were still down 15% for the year!

What caused this dramatic decline? More importantly what can we learn about short- and long-term value of a company from these unusually dramatic stock price changes?

First, we need some context. Global stock markets dropped around 35% in March 2020, so seeing our banks go down by similar amounts sort of makes sense. Everything seemed to be going down, and the banks joined in.

Second, if the economy shrinks then so do bank profits, at least in the short term. Fewer people and companies take out loans, and more loans end in bankruptcy. Both are bad for banks. In addition, history teaches us that during recessions bank stocks go down, and we had a very severe recession this year.

Third, interest rates, especially long-term rates for things like mortgages dropped a lot. Five-year mortgages went from roughly 3% to well under 2%. On the surface this may not seem like a very big drop, but it represents a decline of 30-40% in the rate, and therefore a big hit to lending earnings.

All three of these reasons tell us why the short-term stock prices of our banks dropped. But did the total value of these banks decline by the same amount? That is the most important question, and as is the case with every investment we hold that is the one thing we and our managers stay focused on. When the stock price of a specific company does not reflect what we believe is its real value, we see this as an opportunity to invest.

We are not saying in this article that Canadian banks are, or are not, undervalued. Instead, the purpose of this article is to help our clients better understand how a potential mispricing can take place. Our track record, and that of our managers, has been to identify where these mispricings are actually taking place and taking advantage of them. This usually means successful investors will look wrong in the short run, but over the longer run they will prove their worth.

Best regards,

Brian Trafford, Chief Investment Officer
& Your CH Financial Team

403-237-6570
hi@chfinancial.ca

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Are we a good fit?

We’re looking for aspirational clients who require the whole spectrum of financial services because managing the whole is how we’re able to deliver unbeatable value – it’s our “secret sauce.”If this describes you, let’s set up a meeting andget to know each other.

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We are with you for the long run and are not going anywhere. Jeremy has told us that at these times the numbers tend to scare you, but you haven’t really lost anything if you don’t panic and sell.

Ken M, Calgary

With CH Financial since 1993

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When I became a client of CHF it was a real game-changer as I was going through a very difficult time both professionally and personally.

I went through a divorce and the loss of a job and a parent, all within a 12-month period. While it was very tough to deal with at the time, I was reassured by the fact that the team at CHF had my back and really cared about me and what I was going through.

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I would highly recommend the CHF team to others going through life-changing and difficult situations as your financial partner.

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As an investment industry professional, I am constantly on the go and maximizing my peak career earning years in my 40s. With travel and work commitments I am very limited for time to spend with family and do the things I love to do and chose CH Financial to allow me more freedom and lifestyle balance.

Being in the investment industry my whole career and an extremely busy professional, I know I could probably do a good job at managing my money as I work in the industry after all while I rely on and trust the CH Financial team that they will take care of the details, both growing my assets as well as taking care of every aspect of my financial situation, including my tax, investments and insurance, they simply take away the stress of having to worry about it all and help me to navigate the complexities for me so it all meshes together and importantly saves me valuable time and headaches.

At the end of the day, the reality is I truly value my time and the opportunity cost of my time and would rather hire the best in the industry so ultimately my wife and I can do the things that we love to do, have more leisure time, relax and enjoy spending time in the great outdoors, exploring new countries, hiking in the mountains and volunteer work.

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I would have absolutely no hesitation in recommending the team at CHF to other career-focused busy professionals who really value their time and lifestyle balance.

Kevin & Sharron, Calgary

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Prior to joining CH Financial as a client, I had been partially managing our investments and using a bank-owned broker for many years, with moderate success. When we became clients of CHF, I quickly realized how little I knew about the complexities of managing investments and the importance of seeking out the best specialists in the industry to assist with my family’s full financial picture.

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Being of the sandwich generation my wife and I spend considerable time caring for our surviving parents and our grandkids, so

freeing up valuable time is essential to allow us to do the things we love to do. The team at CHF takes care of the details and today my wife and I enjoy a comfortable, stress-free financial situation.

Over the years as a client of CHF, both our portfolio and wealth has grown exponentially, more than we could have ever imagined. Now that we are both happily retired, having the CHF team in our corner helps us to sleep better at night knowing that our somewhat complex financial puzzle is being looked after by a team of people that really care, as opposed to being treated like a number by a big bank.

I would have no hesitation in recommending the CHF team to others looking for a superior financial home in Calgary and a safe place to invest your hard-earned money.

Ian C, Calgary

Comfortably retired thanks to CH Financial