ETF Investors Pile Into Canada Banks After Earnings Ease Worries

(Bloomberg) -- Exchange traded funds that invest in Canadian banks posted strong inflows last month as lenders reported quarterly results that assuaged fears about future profits.

Financial ETFs saw net inflows of C$123 million ($90.9 million) in May, the second-largest after materials, according to National Bank of Canada. That puts the banking sector in the top spot for net inflows in 2020 of about C$452 million, buoying one of the stock market's most beleaguered sectors.

Investors turned positive on Canada's six biggest banks after they reassured on profitability and took a measured approach to building up reserves to brace for the Covid-19 fallout.

A total of C$726 million traded in notional value last week on 10 Canadian bank-focused ETFs, representing 5.7% of the value traded in the big six banks last week, according to a TD Securities report.

Volumes Jump

Some of the banks seemed to indicate that the worse is behind them, while others were more conservative and indicated moderate provisions for loan losses in the quarters ahead, said analysts led by Andres Rincon, head of ETF strategy at TD Securities. “It was clear from earnings that capital and dividends were not at risk for the big six, which is seen as a positive,” they said.

The strong volumes were led by the BMO Equal Weight Banks Index ETF, iShares S&P/TSX Capped Financials Index ETF, and the BMO Covered Call Canadian Banks ETF -- which combined traded on average C$143 million a day last week or C$716 million throughout the week, TD Securities said.

Many of these ETFs traded notional values last week amounting to multiples of what they normally trade when compared to previous earnings weeks or the average daily value traded. Last week's daily notional value traded was three times the daily average over the last month.

The S&P/TSX Commercial banks index posted its best week in more than a month last week after banks completed earnings reports, rising 7.7% while the S&P/TSX Composite index gained 1.9%. With central bank interest rate cuts keeping net interest margins low, the index is still down about 12% this year, one of the worst-performing sectors on the benchmark.