Wednesday, February 21, 2007

Dundee Securities' Ratings on Banks

Financial Post, Jonathan Ratner, 21 Februaty 2007

Canada’s banks begin reporting first quarter results on Thursday with Toronto-Dominion Bank kicking things off. With several of the Big Six at or near 52-week highs, several analysts see more upside.

Desjardins Securities expects gains of 2% to 10% in the next 12 months, with TD as their “top pick” in the sector.

Analyst Michael Goldberg has a $75 price target on the stock, representing upside of roughly 7%.

He also has “buy” recommendations on shares of Bank of Montreal and Bank of Nova Scotia, while CIBC, National Bank, and Royal Bank are rated “hold.”

In the first quarter, Canadian bank stocks climbed 7.1% (quarter-over-quarter) following positive fourth quarter results, but fell short of life insurance companies, which gained 8.1%, Mr. Goldberg said in a research note.

CIBC was the top performer, up 15.2%, while BMO only gained 0.8%.

“We expect to see continuing positive operating leverage from the banks, driven by still-strong economic activity producing robust loan growth,” he said. “Even with margins that may seem compressed, we expect another quarter of double-digit year-over-year operating profit growth.”
Dundee Securities

• BMO - market neutral, 12-month price target is $75.00
• CIBC - market outperform, 12-month price target is $115.00
• National Bank - market neutral, 12-month price target is $68.00
• RBC - market neutral, 12-month price target is $59.00
• Scotiabank - market outperform, 12-month price target is $57.00
• TD Bank - market neutral, 12-month price target is $76.00
Financial Post, Jonathan Ratner, 20 Februaty 2007

Dundee Securites analyst John Aiken, who has taken over coverage of Canada’s banks from Susan Cohen, admits he is a fan of the sector.

Indeed, the track record for bank stocks has been stellar,thanks to earnings growth and the creation of shareholder value.

Mr. Aiken expects shares of CIBC, Bank of Nova Scotia and Canadian Western Bank will be the top performers in the sector during the next twelve months.

He has a $115 price target on CIBC, a $57 target for BNS and expects Canadian Western will reach $28.

However, he thinks Bank of Montreal could benefit most in the short term from an environment of deteriorating credit quality.

He also thinks Royal Bank and Toronto-Dominion have compelling risk-reward profiles for the next five to ten years due to their presence in the domestic personal and commercial banking market, as well as growth prospects in the U.S.

So given this broad bullishness, where should investors, who are likely searching for long-term stable earnings growth, put their money?

Mr. Aiken notes that Canada’s banks are no longer similar in their business strategies or in their exposure to various businesses and markets. As they continue along this path, he thinks they will become more and more different from each other.

He stresses the importance of quality earnings, but also likes banks that diversify.

“Although the downside is that a bank does not experience the same run-up if a particular area or line of business increases, over the longer-term diversification produces are more stable, respectable earnings profile,” he said.

Mr. Aiken also thinks the personal and commercial banking business, where he thinks TD, Royal and Canadian Western have the most positive leverage, offers relatively stable growth, less volatility, a profitable deposit business and the opportunity to boost business in other areas such as wealth management.

However, there is no shortage of other factors that differ substantially for each of Canada’s banks. These include their international exposure, revenue stream mix, interest rate sensitivity, foreign exchange positions and capital markets businesses.

So while picking a bank stock may present a tough choice, be grateful that there are many good options to choose from.