Thursday, January 03, 2008

Dundee & Desjardins' Outlook for the Financial Sector

Financial Post, Jonathan Ratner, 3 January 2008

It was a turbulent year for the financial sector. Make that the banks, who had a particularly weak second half of 2007. While Canadian lifecos outperformed the S&P/TSX composite index just slightly last year, climbing 7.3% and 7.2%, respectively, the banks declined 9.9%, according to Desjardins Securities.

Analyst Michael Goldberg predicts the tough times will continue in 2008, with the financials as a whole expected to perform worse than last year and the lifecos to outperform the banks.

“Once again, dividends and dividend growth are king,” he told clients in a note, adding that Toronto-Dominion Bank, Bank of Nova Scotia and Manulife Financial Corp. continue to be rated “top pick.”

“They [lifecos] continue to have stronger profitable business platforms and greater management depth outside of Canada than the banks,” Mr. Goldberg said. He also said a more stable loonie will become more evident in their international operations and the lifecos will benefit from the aging global population’s desire for long-term savings.

The fact that most lifecos start from a lower dividend payout base when compared to the banks points to stronger dividend growth for lifecos in 2008.

The analyst also likes low loan-to-value alternative lenders Home Capital Group Inc. and Quest Capital Corp., Kingsway Financial Services Inc. due to its diverse businesses and attractive valuation, and Brookfield Asset Management Inc. for its alternative asset management business. They are all rated “buy” at Desjardins.

As for the banks, Mr. Goldberg acknowledged the many differences between Canadian and U.S. names and their respective economies, but insisted that Canadian banks will be affected by slower U.S. bank lending.

“While credit spreads widen, existing loan spreads may not widen at the same pace,” he said. “On balance, if loan growth is slow, the effect is a slowdown in net interest revenue and related fee income.”
Financial Post, David Pett, 31 December 2007

Manulife Financial Corp. appear to have avoided the headaches associated with the ongoing credit crisis that has gripped the financials sector over the past few months, Dundee Capital analyst Susan Cohen says.

She recently reviewed Manulife's credit quality and said in a note to clients that the company's exposure to subprime mortgages – estimated somewhere around $860-million – is benign and material losses are not expected. Meanwhile, she said the company has no exposure to collateralized debt obligations (CDOs) or structured investment vehicles (SIVs).

As for the company's bond portfolio which totals $97-billion, Ms. Cohen noted that Manulife looks at the quality of the underlying bond and does not invest on the strength of the financial guarantor.

"Therefore the strength of the financial guarantor (i.e. the fact that S&P downgraded several) is not a factor and will not result in losses." she said.

She did acknowledge, however, that should 2008 usher in recessionary conditions and the unfolding of a normal credit cycle, it is likely that some deterioration in the company's credit quality will occur.

That said, she told clients it is premature to revise 2008 earnings estimates at this time and left her "market perform" rating and $45.75 price target unchanged.

"We maintain that credit quality at Manulife is superior to that of most Canadian banks and many US lifecos and thus remains a relatively defensive investment."