The rise in Canadian financial stocks has largely been fuelled by investors retreating from short positions on the resource-heavy country, Bank of Montreal CEO William Downe said.
"It is the case that large Canadian institutions felt the pressure of the negative Canada trade in the last year," Mr. 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 per cent 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 per cent to 10 per cent despite slowing since the recession, said Mr. 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."