What has happened?

• After a stellar run from their 2020 lows, Canadian banks, as represented by the S&P/TSX Composite Banks Index, fell 10% from February 9, 2022, to April 18, 2022.
• Throughout the same period, the broader S&P/TSX Composite Index rose 1.25%. The Russian invasion of Ukraine shocked markets and triggered a divergence between bank stocks and the broader S&P/TSX Composite Index.
  - The broader S&P/TSX Composite Index has outsized exposure to natural resource and energy stocks, which have benefited from the higher commodity prices caused by the Russia/Ukraine conflict.
• Renewed recession fears, as a result of steeper-than expected monetary policy tightening by the Bank of Canada and an inversion of the U.S. 2-10yr Yield curve, have also contributed to bank stock weakness.
  – Banks often act as proxies for economic health; therefore, banks underperform when markets fear a recession.

What is our outlook?

• While equities, and specifically bank stocks, may be volatile over the short-term, we continue to have confidence in the sector.
• We think it is too early to worry about the impact of a potential recession on bank profitability. We believe the odds of a recession are still fairly low.
• Strong loan growth and credit conditions, an expanding net interest margin (NIM), excess capital, and a valuation for the sector that is in-line with its historical average, all contribute to an attractive risk-reward profile for the sector.
• We continue to own banks and carefully monitor their trajectory along with the speed of Bank of Canada rate hikes.