Thursday, March 02, 2006

Banks' Quarterly Results Pique Investor Interest

The Globe and Mail, Allan Robinson, 2 March 2006

Banks carry a lot of weight, in this country at least, accounting for 18.6 per cent of the S&P/TSX composite index. So this week's release of first-quarter earnings for three of the biggest is bound to garner a lot of attention, with Canadian Imperial Bank of Commerce possibly providing one of the most intriguing trading opportunities.

The two reporting today are CIBC and National Bank of Canada. Royal Bank of Canada and Bank of Nova Scotia report tomorrow.

Canadian financial stocks, which include banks, insurers, brokers and fund managers, were the third best performing group in the S&P/TSX composite during the past 12 months, increasing 22.7 per cent, compared with a 25.4-per-cent increase in the utilities and the 42.3-per-cent gain by the energy stocks.

So far this year the financials have increased 4.5 per cent, but they are lagging behind the consumer discretionary, health care, materials and industrial groups, which have increased between 5.5 per cent and 9.7 per cent.

Bank of Montreal, which had been scheduled to report its results today, released them yesterday after the market closed because partial results had been distributed in error during the afternoon to a group of bank employees, it said. The bank reported its earnings increased by 4.7 per cent to $630-million or $1.22 a share during the three months ended Jan. 31.

The greatest uncertainty surrounds CIBC. There are five "buy" ratings, six "hold" and three "sell."

Analysts forecast CIBC's profit for the first quarter at $1.49 a share, compared with $1.46 a share a year earlier, according to Thomson First Call. Its profit for fiscal 2006 is estimated at $6.17 a share, compared with $6 in fiscal 2005. The shares of CIBC closed yesterday at $79.56 and they yield 3.4 per cent.

While CIBC's operating results are likely to remain below par, there is room for the bank to impress on a cost-savings front this year, said Jason Bilodeau, an analyst with UBS Securities Canada Inc. "Over all, we continue to see reduced risk and improved productivity emerging as key catalysts for CIBC through 2006." Mr. Bilodeau has a "neutral" rating on CIBC shares and a 12-month share price target of $88. He estimates CIBC could earn more than $7 a share in fiscal 2007.

Among the Canadian banks, CIBC continues to be the most inexpensive based on its dividend yield compared with the interest on long-term corporate bonds, Michael Goldberg, an analyst with Desjardins Securities, said in a recent report. "We see CIBC shares as a trading opportunity driven by expected improvement in its capital over the coming year and improved potential that it can resume dividend growth," he said.

While CIBC is likely to achieve its expense reduction targets, the bank faces provisions for credit losses, the inability to repurchase shares significantly and muted revenue growth, said Mario Mendonca, an analyst with Genuity Capital Markets, who has a "sell" rating.