One portfolio manager said that Canada’s largest banks are pricing in a recession to occur around the end of the year, which is weighing on sentiment for bank stocks. 

Amit Joshi, an associate portfolio manager at Barometer Capital Management, said in an interview with BNN Bloomberg Tuesday that bank stocks have underperformed relative to the Toronto Stock Exchange. 

“We're at a place where we think the banks themselves are pricing in the worst-case scenario in terms of a recession towards the end of this year or early next year,” he said. This has resulted in investors’ “being jittery [when] holding the bank stocks,” Joshi said.

The group of lenders will start reporting second-quarter earnings on May 24, with Bank of Montreal and Bank of Nova Scotia.

However, Joshi said that dividend yields for Canadian banks remain strong, “sitting at about 4.8 per cent.” 

Joshi said he is taking a “wait and see” approach to owning Canadian bank stocks, but added that positive signs can be seen in economic consumer data, which remains “very strong.” 

“I think you just want to see stability in credit and performance from the banks themselves. We want to watch out for revenue growth… the net interest margin is something that we want to keep an eye on. Funding costs have been ticking up higher, so that will be a key focus this time around,” he said. 

The Canadian banking industry is also markedly different from the U.S., according to Joshi. 

“The Canadian banks are different from the U.S. in terms of being very well capitalized, especially compared to the U.S. regionals,” he said, adding that they have a sticky deposit base.

Last week, analysts at RBC Capital Markets released a report predicting a difficult quarter for the nation’s major lenders, while stating macroeconomic conditions have become more uncertain.