Friday, May 19, 2006

Q2 2006 Earnings Reports Start Next Week

The Globe and Mail, Allan Robinson, 19 May 2006

Investors in Canada's Big Five chartered banks will be poring over second-quarter results during the next two weeks after seeing share prices drop from record levels since March.

The drop in those prices has created a buying opportunity because the banks are expected to report strong profit growth, analysts say.

The largest Canadian banks alone account for more than 16 per cent of the S&P/TSX by market capitalization and if the two largest life insurers (Manulife Financial Corp. and Sun Life Financial Inc.) are included, the seven financial giants account for almost 23 per cent of the index.

On a year-to-date basis, the financial sector is up only 0.05 per cent, after ringing up a gain of 16.7 per cent during the past 12 months.

The 6-per-cent drop in bank shares during the past two months reflects a weak stock market and interest rate worries, said Jason Bilodeau, an analyst with UBS Securities Canada Inc. "Heading into what should be a generally positive second-quarter news flow, we see room for upside," he said.

Profit-reporting season gets under way on Wednesday with Bank of Montreal scheduled to report, followed by Toronto-Dominion Bank and National Bank of Canada on Thursday and the Royal Bank of Canada on Friday. Bank of Nova Scotia is scheduled to report its results on May 29 and Canadian Imperial Bank of Commerce on June 1.

According to Thomson First Call, analysts forecast second-quarter 2006 earnings for BMO of $1.21, compared with $1.09 a year earlier; $1.13 for TD Bank, compared with $1; $1.20 for National Bank, compared with $1.08; 82 cents for RBC, compared with 70 cents; 84 cents for Scotiabank, compared with 76 cents; and $1.56 for CIBC, compared with $1.41.

This week UBS Securities increased its ratings on RBC, Scotiabank and TD to "buys" from the "neutral" ratings.

"Canadian bank valuations compared to their international peers have not been compelling in recent quarters," according to a report by Susan Cohen, an analyst with Dundee Securities Corp. "However, this valuation gap narrowed materially in early May, owing to a correction in Canadian bank stocks and a rally in U.S. bank stocks," she said.

The share price decline provides investors with a chance to buy banks in advance of what is expected to be a reasonably good second-quarter profit reporting season, Ms. Cohen said.

The recent decline in bank shares has shaved a full multiple point off of their forward price-to-earnings multiples to 11.7 from 12.8, according to CIBC World Markets Inc.

However, some analysts are expecting a slowdown in profit and dividend growth in the second half of fiscal 2006 and into 2007 as loan growth slows and credit costs increase.