Thursday, August 02, 2007

Citi Analyst's Comments on Banks

The Globe and Mail, Angela Barnes, 2 August 2007

Financial stocks on both sides of the border were bounced around yesterday in the face of mounting credit worries and turmoil in the debt markets arising out of subprime mortgage market woes.

But in a contrarian stance, Citi Global Markets Inc. suggested the selloff in recent days is creating compelling buying opportunities in the sector.

Three Canadian banks, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, and Bank of Montreal, appear on the list of financial stocks that the Citi team considers oversold in the wake of the subprime worries.

Citi's "buy on weakness" recommendations were made, it should be noted, before yesterday's trading.

The Citi team came up with a list of North American financial stocks that it believes have little or no subprime risk. Buying them should produce returns of between 17 and 44 per cent, Citi said.

In trading on the Toronto Stock Exchange yesterday, shares of CIBC fell 2.2 per cent, Scotia slid 1.3 per cent and BMO lost 2.2 per cent. The S&P/TSX financial sector fell 1.1 per cent.

In the United States, the S&P 500's financials index fell sharply during the day, but recovered in the last half-hour of trading to finish in positive territory.

Still, shares of Bear Stearns Cos. Inc., which saw two of its hedge funds collapse last month and is now stopping withdrawals from a third, dropped $2.92 (U.S.) to close at $118.30, and Lehman Bros. Holdings Inc. shares lost $1.18 to $60.82. Both trade on the New York Stock Exchange. E*Trade Financial Corp. shares slid $1.02 to $17.50 on the Nasdaq Stock Market.

For most of yesterday, the market was listening to negative views from analysts such as Andre-Philippe Hardy of RBC Dominion Securities Inc., who lowered his stock-price targets for BMO, CIBC, Scotia, Toronto-Dominion Bank and National Bank of Canada.

He cut his earnings estimates for the banks' wholesale and wealth management divisions based on the risk of continued weakness in the capital markets, and reduced the multiples on profit from those areas to reflect the rising uncertainty.

The analyst cut his 12-month stock price target for BMO to $69 from $71; CIBC to $108 from $114; National to $64 from $65; TD to $81 from $82 and Scotiabank to $54 from $57.

Tobias Levkovich, Citi's chief U.S. equity strategist, acknowledged in the Citi report that investors are worried about the possible evaporation of financial institutions' deal fees, declines in trading commissions, the status of lending facilities to hedge funds and acquirers, and even proprietary trading desk positions.

But he said, "we suspect the almost singular focus on financial sponsors and their ability to tap the credit market misses the point that U.S. equities are still very attractively priced," unlike the situation in 2000. Profits remain solid, he added.

U.S. financial stocks on Citi's recommended list included Merrill Lynch & Co. Inc., American Express Co. and NYSE Group Inc.

Shannon Cowherd, who covers the Canadian banks for Citi, recommends investors buy Scotiabank, CIBC and BMO on the expected pullback after the third-quarter results are reported, beginning Aug. 22. She said the fundamentals for the banks remain intact and that the banks' asset bases are large enough to absorb the losses expected on loans and writedowns on securities holdings "with minimal long-term impact." She also noted that the Canadian credit and housing fundamentals remain robust.

The Canadian banks do not have direct exposure to the U.S. subprime market, though they are active in some secondary markets and will be "affected by the spillover contagion impacting various structured products," she added. She has 12-month price targets of $64 (Canadian) for Scotiabank, $121 for CIBC and $85 for BMO.