Investors do not take kindly to surprises. Just ask shareholders of Royal Bank and CIBC. Two weeks ago, Royal reported excellent earnings although slightly less than forecast. The result: investors knocked 3% off the value of the stock. Same results with CIBC, even though the bank blew out expectations, they fell short of the “whisper” number. CIBC down 6%.

Stocks have fallen further on the back of potential rate hikes. Not to mention the impact a strong Canadian dollar could have on their off shore operations. Analysts assume that the strong loonie will have the greatest negative impact on Bank of Nova Scotia given their Latin American operations.

To my mind, the question is how are investors valuing the bank stocks. Are they valuing on the basis of perfection or on the basis of excellence. Based on the slippage in Royal and CIBC, it would seem that initial reactions fall under the perfection scenario.

There is no doubt that Canadian bank P/Es are at the high end of trailing earnings. And that may be too high if they get blindsided by the surging Canadian dollar. Assuming, of course, they have done nothing to hedge their foreign exposure.

But on the positive side, anyone holding financial stocks have got decent raises since the beginning of the year. In the last two weeks, Bank of Nova Scotia announced a 7% dividend increase, while Manulife came through with a 10% dividend hike.

In February & early March, Bank of Montreal raised their dividend by 4%, CIBC up 10%, Great West Lifeco 6%, Sun Life up 6%, Toronto Dominion 10%, and Royal Bank 15%. Maybe investors should focus on this aspect of the business rather than fluctuating share prices?

Make no mistake, a dividend increase is the best way to gauge management’s optimism. Since no management wants to cut dividends, it implies continued growth to the bottom line of Canadian banks.

The question is at what rate?

Like so many investment decisions, whether Canadian banks are a buy, sell or hold comes down to sentiment. Given the recent fallout, I would argue that the banks are being priced for excellence. That’s a tall hurdle, but one I think they can mount.

Interestingly, despite the recent sell-off in the banks, the options have remained at the low end of their implied volatility range. That means that call buying looks interesting, particularly short-term at-the-money (i.e. July or August expirations) calls.