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Tuesday 14th of October 2008

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January 10, 2008

Canadian banks to hit rocky road in 2008

by Richard Kilner

Story link: Canadian banks to hit rocky road in 2008

Canada has suffered its worst banking stock performance for over a decade, and the prospects for 2008 do not seem to be much of an improvement.

In 2007 banking stocks lost a tenth of their value, and in the few days of 2008 that have transpired they have lost a further 4%.

No. 5, Canadian Imperial Bank of Commerce has removed two senior staff members from their posts, (the risk management leader and one of their top investment bankers).

The industry consensus is that 2008 will be a turbulent period, particularly in the first half of the year, but that the latter half may see something of a more benign market.

In recent years Canada’s banking business has boomed, with its largest financial institutions recording double-digit returns on stock almost continuously since 2003, and with generally increasing dividend payouts.

However, the US subprime mortgage crisis and the ensuing credit crunch affected much of the world, and Canada was no exception.

That said, the nation’s banks are better placed than US institutions to weather the financial storm. Although Canada’s banks lost a tenth of their stock value in 2007, American banks lost a third.

The reason behind the limited exposure to the credit crunch in Canada is that the country’s banking sector had far less involvement in investment banking which has been most seriously affected by the recent crisis.

Unfortunately the credit crunch is not the only difficulty Canadian banks must face in 2008. They must also contend with a strong Canadian dollar and a slowdown in the economy.

Over the last four years banks have averaged an earnings rise of around 16% per annum, but this expected to more than halve during this calendar year.

 

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