Canada Banks Surge Led by Retreat of Short Positions, Downe Says

(Bloomberg) -- The rise in Canadian financial stocks has largely been fueled by investors retreating from short positions on the resource-heavy country, Bank of Montreal Chief Executive Officer William Downe said.

“It is the case that large Canadian institutions felt the pressure of the negative Canada trade in the last year," Downe, 64, said Tuesday in a Bloomberg Television interview in New York. “So I would say it's more the case of a large short position against Canada as a commodity origination coming off as opposed to a run-up in the valuation.”

Canadian banks stocks have surged as the country's economy improved, commodities prices started to rebound and continued profit growth allayed fears of rising losses from energy loans. Bank of Montreal shares have climbed 36 percent in the past 12 months, outperforming the 33 percent advance of the eight-company S&P/TSX Commercial Banks Index.

Commercial banking has had “very good growth" of 8 percent to 10 percent despite slowing since the recession, said Downe, whose bank is Canada's fourth-largest by assets. Domestic loan growth that's “a little bit slower” is OK since Canadian consumers are at the limits of their capacity, he said.

The environment for North American banks is good, with improvement possible as U.S. interest rates rise, Downe said. He expects “an inexorable march back” by the U.S. Federal Reserve to a neutral rate, which could be around a “full point and a half above where we are now.”

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net.

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net, David Scanlan at dscanlan@bloomberg.net, Steven Crabill, Dan Reichl