Tuesday, November 29, 2005

TD, BMO Seen Gaining Most from Proposed Tax Breaks

Scotiabank's strong excess capital makes it best placed to raise dividend, analyst says

The Globe and Mail, Allan Robinson, Tuesday, November 29, 2005

Canadian investors will be closely eyeing the fourth-quarter profit reports of the bank stocks this week now that Finance Minister Ralph Goodale has proposed tax changes that will significantly boost the value of their dividends.

The proposed taxation changes should boost the after-tax value of dividends from large corporations by 17 per cent, said Michael Goldberg, an analyst at Desjardins Securities Inc. in a report yesterday.

Bank of Montreal and Bank of Nova Scotia are scheduled to report today. Royal Bank of Canada is scheduled to report its fourth-quarter results tomorrow and Canadian Imperial Bank of Commerce on Thursday.

"The two banks that have the most relative upside are Toronto-Dominion Bank and Bank of Montreal at 15 per cent each," Mr. Goldberg said.

TD Bank is a "unique growth situation among the Canadian banks," while Bank of Montreal, a laggard, has the potential to report a positive earnings surprise today, he said.

Assuming that there is a 75-per-cent chance that the proposed tax changes will be implemented, Desjardins Securities estimates Laurentian Bank of Canada has a 9-per-cent upside potential. The upside potential of the other banks, according to the investment dealer, are as follows: Bank of Nova Scotia (6 per cent); CIBC (5 per cent); and Royal Bank (3 per cent).

However, UBS Securities Canada Inc. said yesterday that the proposed tax changes are only mildly positive for Canadian financial stocks.

Share prices are determined not only by the demand from taxable investors but also non-taxable investors such as pension funds and foreign investors, analysts said yesterday.

Scotiabank has the best capacity and inclination to ratchet up its dividend in the near term, said Jason Bilodeau, an analyst with UBS Securities.

The shares of Scotiabank, which closed yesterday at $47.09 on the Toronto Stock Exchange, up 9 cents, yield 2.89 per cent. During the past five years the dividends have increased by 21.4 per cent a year.

However, rising interest rates in Canada and slower growth could overshadow the beneficial impacts of the proposed tax changes, Mr. Bilodeau said.

Analysts forecast Scotiabank could earn 79 cents a share during the fourth quarter of fiscal 2005, compared with 66 cents a share a year earlier, according to Thomson First Call.

Its profit for fiscal 2005 is estimated at $3.10 a share, compared with $2.67 a share a year ago.

Scotiabank's "industry-leading excess capital gives [it] the flexibility to repurchase stock, raise the dividend and make acquisitions throughout 2006," said Mario Mendonca, an analyst with Genuity Capital Markets.

"We expect Bank of Nova Scotia to chip away at the bank's growing mountain of surplus capital with a healthy dividend boost, including a potential increase in the payout . . . and the pursuit of a more active share buyback program," Mr. Bilodeau said.

Analysts forecast Bank of Montreal earned a profit of $1.10 a share during the fourth quarter of fiscal 2005, compared with $1.04 a share a year earlier. Its profit for fiscal 2005 is estimated at $4.41 a share, compared with $4.43 a share a year ago.