Citi Research published a report today titled “Canadian Banks Big Picture Winter 2013”. In the report, Citi analysts Stefan Nedialkov and Rahul Bajaj highlight the current relative strength of the Canadian banking sector, although both loans and deposits slowed down incrementally in 2H 2013 versus 1H 2013. The analysts also highlight Canadian Imperial Bank of Commerce (NYSE:CM) (TSE:CM) and Bank of Montreal (NYSE:BMO) (TSE:BMO) as their top picks in the sector.

Canadian banks: Loan and deposit growth steady

The report points out that both loan and deposit growth remains remains relatively strong in the Canadian banking sector. “Canadian loan growth remained solid with 3Q13 total lending 6.5% yoy vs 7.1% in 2Q13. Residential mortgages (c 52% of the outstanding loans), grew 5.9% yoy in 3Q13 vs 4.9% in 2Q13. Corporate loans (c 10% of outstanding loans) grew 9.9% yoy in 3Q13. Other personal loans (ex mortgages) remained lackluster, growing at a mere 2.9% yoy in 3Q13. On the deposit side, overall growth was relatively strong at 5.7% yoy in 3Q13 vs 6.6% yoy in 2Q13. Personal deposits (c55% of outstanding deposits) grew 5.3% yoy in 3Q13 vs 6.2% yoy for non-personal deposit.”

canadian banks loan volumes

canadian banks loan volumes - 2

canadian banks deposit volumes

Housing sector cooling off and bank asset quality stable

Nedialkov and Bajaj also highlight that the housing market in Canada is finally showing signs of cooling off, and fears of a speculative bubble-induced hard landing for Canadian residential real estate seem overblown. Bank assets are also stable and trending upwards. “Major indicators for asset quality remained stable in 2013. For the domestic banking system, 9M13 gross impaired loans as % of total loans declined to 0.58% vs 0.66% at end-2012. Coverage for bad loans was also slightly up at 93% vs 88% at end-2012. However, some forward indicators like consumer bankruptcies and corporate bankruptcies were up slightly in 2013 vs 2012 levels, although growing at a slower rate.”

canadian banks housing market summary

Citi’s Canadian banking sector top picks

The report recommends CIBC and BMO as CitiResarch’s top picks in the sector based on potential return and potential exposure to rising interest rates. “We upgraded Canadian Imperial Bank of Commerce (NYSE:CM) (TSE:CM) to Buy from Neutral (TP $102 from $84) and downgraded TD to Neutral from Buy (TP $52 from $50). Our preferred names in the space are CIBC and Bank of Montreal (NYSE:BMO) (TSE:BMO) (both Buy-rated) while The Bank of Nova Scotia (NYSE:BNS) (TSE:BNS), Royal Bank of Canada (NYSE:RY) (TSE:RY) and Toronto-Dominion Bank (NYSE:TD) (TSE:TD) are Neutral-rated.”