WHY 2017 MAY BE A TOUGH YEAR FOR BIG SIX BANK STOCKS

It was another good year for Canadian bank stocks in 2016, with the Big Six enjoying an average gain of more than 25 per cent.

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, according to John Aiken at Barclays.

“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,” the analyst told clients.

He noted that each of the Big Six banks enjoyed multiple expansion over the past year.

That’s one reason why Aiken doesn’t think the current enthusiasm boosting U. S. banks stocks doesn’t mean much for Canadian banks.

The analyst 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’s hardly an impressive number.

Aiken noted that the market appears to be pricing in a more optimistic outlook than what is reflected in analysts’ forecasts, which can be explained by the likelihood of higher interest rates.