Wednesday, December 13, 2006

UBS Says Banks & Life Insurance Cos Fully Valued

Financial Post, David Berman, 13 December 2006

Canadian financial stocks have been on a tear in 2006, especially after the downfall of income trusts sent money flowing into the high-yielding sector. Now, Jason Bilodeau, an analyst at UBS, is less enthusiastic.

In a note to clients this week, he lowered his recommendation on Industrial Alliance and Sun Life Financial (once his top pick) to "neutral" from "buy," because of the strong rallies both stocks have experienced.

"Sun Life has recovered from its summer doldrums, breaking through new all-time highs," Mr. Bilodeau said. "We continue to see upside in operational improvements, and capital deployment, but the valuation discount relative to Manulife Financial Corp. has narrowed considerably."

However, he raised his 12-month price targets on the two insurance companies slightly. His target on Sun Life is now $56, up from $55 previously. It closed yesterday in Toronto at $50.10. He also raised his target on Industrial Alliance to $39 from $38. It closed at $36.10. (He is maintaining a "buy" recommendation on Manulife, with a target of $44.)

At the same time, he is staying "neutral" on most bank stocks because of lower growth prospects in 2007.

"It is hard not to like the banks as they continue to post record profits with few obvious concerns looming for the immediate term," Mr. Bilodeau said. "However, the group has made a strong recovery from its late spring/early summer lows and valuations have returned to full levels."

Toronto-Dominion Bank, which he expects will continue to deliver strong earnings growth because of its strong domestic operations, is his lone "buy" among Canadian banks, with a target price of $77. It closed yesterday at $67.85.