Canadian bank stocks were extremely volatile in the closing months of 2018. Financial stocks took a beating from September to December largely due to a global stock market sell-off that spilled over to the TSX. Coming into 2019, many of the top Canadian bank stocks looked like bargain. After all, banks reported solid earnings across the board in 2018, even in the face of turmoil in the housing market and rising rates, which have pressured Canadian consumers.
Back in October 2017, I’d discussed the race to $100 that was underway for the two stocks we will focus on in this article. That race did have a winner, but both stocks managed to hit the mark before encountering weakness throughout 2018. Should investors count on both to rise back to triple digits in 2019?
Royal Bank of Canada (TSX: RY)(NYSE: RY)
Royal Bank stock has climbed 3.7% this month as of close on January 14. Shares are still down 1.9% over the past three months and 7.8% year over year. Royal Bank stock sank into oversold territory, as its RSI fell below 30 in December, but it has since recovered, and at an RSI of 61 its stock has built healthy momentum.
Royal Bank is the largest financial institution in Canada. In 2018, the bank reported record net income of $12.4 billion. This was fueled by 23% earnings growth in its Wealth Management segment, and adjusted earnings rose 9% in Personal and Commercial Banking. Like its peers, Royal Bank will be forced to contend with slowing growth in Canada and across the developed world in 2019 and beyond.
The Bank of Canada downgraded its economic forecast in its recent January meeting, while keeping the benchmark rate at 1.75%. Canada’s GDP is now expected to grow by 1.7% in 2019 compared to an earlier projection of 2.1%. This slowdown will weigh on Canada’s top financial institution in 2019.
Bank of Montreal (TSX: BMO)(NYSE: BMO)
Bank of Montreal stock has climbed 4% in 2019 so far. Shares are down 9.3% year over year. BMO stock hit a 52-week high of $109 in late September before succumbing to the global stock market sell-off. Shares sank deep into oversold territory in December but have since recovered, as its RSI sits at 56 as of close on January 14.
In 2018, BMO saw adjusted earnings per share rise 10% year over year to $8.99, and adjusted net income increased 9% to $5.98 billion. BMO saw its biggest boost in its U.S. Personal and Commercial Banking segment. In Q4 2018, adjusted net income in this segment rose 36% year over year to $383 million. Back in March 2018, I’d discussed why U.S. tax reform would serve as a boon for banks like BMO that have a sizable footprint south of the border.
Unfortunately for BMO, U.S. growth is also set to slow significantly in 2019. The U.S. Federal Reserve cut its estimate for U.S. GDP growth to 2.3% in 2019, down from a 2.5% projection in September. In January, Goldman Sachs projected that S&P 500 companies could experience only 3% earnings growth in 2019. Financials will be particularly hard hit as the sugar rush from U.S. tax reform wears off.
Can either stock rise back to $100 in 2019
Bank stocks looked oversold heading into 2019 and still have room to run to recoup losses after a solid performance in January so far. However, broader economic headwinds on the domestic and international end should come as a concern for investors. Royal Bank and BMO will be hard-pressed to challenge 2018 highs in this environment.
