Thursday, February 23, 2006

Cdn Banks & Sub-prime Lending

National Post, Keith Kalawsky, 23 February 2006

The Canadian banks dominate financial services in Canada, with the exception of two areas: life insurance and sub-prime lending.

The banks aren't allowed to sell insurance through their branches, but they are now moving into sub-prime, as shown by Toronto-Dominion Bank buying automotive lender VFC Inc. and Bank of Nova Scotia acquiring Maple Trust, a mortgage company.

There are three sub-prime lenders that potential takeover targets for the banks keen on exploiting what could be the final frontier of financial services: Home Capital Group Inc, Xceed Mortgage Inc., and Equitable Group Inc. Since the acquisitions by TD and Scotiabank, the share prices of all three have taken off.

Since Feb. 16, the date of TD's deal announcement, Xceed is up $1.41 or 17% to $9.90. Equitable has risen $2.74 or 11% to $26.99. Home Capital, the least likely target because of its high valuation, according to analyst Darko Mihelic at Blackmont Capital Inc., has increased $1 to $41.50.

Based solely on the hefty price TD paid for VFC, Equitable could go for $41.46 a share, Xceed could fetch $15.94 and Home Capital could get $37.43, the analyst noted in a research note last week. Mr. Mihelic's price targets on Equitable, Xceed and Home Capital are $30, $11 and $9, respectively. His targets are adjusted downward by a risk discount.

"We believe the Canadian banks are likely to enter the non-prime mortgage market via acquisitions given their excess capital, limited growth opportunities and the attractiveness of the non-prime mortgage market," Mr. Mihelic wrote. "In our view, this trend has played out in the U.S. and U.K. market and it is a logical extension of the banks' business in Canada."