Wednesday, July 05, 2006

UBS Upgrades CIBC

The Globe and Mail, Angela Barnes, 5 July 2006

UBS Securities Canada Inc. has upgraded Canadian Imperial Bank of Commerce to “buy” from “neutral,” saying it feels the risk-reward on the bank is attractive. “While revenue concerns remain at the forefront, recent underperformance sees it trading near 11 times earnings and we continue to see upside in the cost savings story,” said UBS analyst Jason Bilodeau.

The upgrade was contained in a report that suggests the current environment offers an attractive buying opportunity in the Canadian banks. Inflation concerns and rising interest rates are dominant themes for the sector and the recent sharp rise in 10-year Canadian bond yields has been a major factor accounting for the relative underperformance of the banks recently and the continuing uncertainty about how high rates could go might provide headwinds near-term for the sector. However, Mr. Bilodeau said “we believe we are nearing the end of the rate tightening cycle” and “historically, the end of the rate tightening cycle has been an attractive entry point for the group.” He added, “while our timing is potentially early, we see compelling returns on a 12-month view.”

Mr. Bilodeau's top pick among the banks is Toronto-Dominion Bank, although he added that the near-term sentiment on the bank is clouded by challenges at TD Banknorth and the impact of choppy markets on TD Ameritrade. He considers the concerns about Banknorth and Ameritrade are “largely overdone' and thinks the second half of the fiscal year should bring improvements. He also rates Royal Bank of Canada and Bank of Nova Scotia as buys. The other banks are rated neutral.

For the life insurance issues, the move to higher rates is likely to boost profitability and margins should improve, he said. “Higher rates may also resuscitate flagging sales in fixed return products,” he added.

For both the banks and lifecos, weak markets could pose a problem, he indicated.

His top pick among the lifecos is Sun Life Financial Inc.