Wednesday, November 22, 2006

Desjardins Securities on Banks

Financial Post, Grant Surridge, 22 November 2006

The good times continue to roll in the Canadian banking sector. Earnings and dividends will keep rising in the fourth quarter, in what Desjardins Securities analyst Michael Goldberg predicts will be another "golden quarter."

Canadian banking stocks were up 9.4% in the period from August to October, versus 4.3% for the TSX Composite, and 2.6% for banks south of the border.

Canadian Imperial Bank of Commerce led the charge, up 13.4% over last quarter, with TD close on its heels with 12.7% growth.

Mr. Goldberg notes that this performance doesn't even reflect the positive impact from the federal government's income trust announcement at the end of October.

Many of the positives enjoyed by banks in the third quarter should propel double-digit operating profit growth in the fourth, despite pressure on net interest margins, according to Mr. Goldberg. A robust economy likely drove strong loan growth, with takeover activity seemingly becoming more prevalent.

While Mr. Goldberg sees this as an indication of continuing upward momentum in loans, it also probably means a maturing of the credit cycle. This will mark the eighth consecutive quarter of strong growth for Canadian banks.

The fourth quarter should also see four of the six major banks post higher dividends, with increases ranging from 7% at CIBC to 3% at Bank of Montreal.

Toronto-Dominion remains Mr. Goldberg's top pick among banks, with a target price of $76.50. BMO, Scotia Bank, CIBC and Royal Bank are all rated "buy," while National Bank is a "hold."

He sees banking shares rising four to 16% over the coming year, with TD and BMO near the top of that range and Royal Bank at the bottom.