Wednesday, January 16, 2008

Dundee Securities on Banks

Financial Post, Duncan Mavin, 16 January 2008

For the first time in four years, there will be no meaningful earnings growth at Canada’s banks in the next 24 months, says Dundee Securities analyst John Aiken.

The banks have sidestepped the worst of the carnage from the U.S. subprime crisis — with the exception of Canadian Imperial Bank of Commerce, which has US$3.3-billion of writedowns so far. But other “clouds are looming,” Mr. Aiken says.

A slowdown in the U.S. economy will have an impact on credit quality on both sides of the border. Banks will also have problems shifting loans off their books as they have done in the past because of the collapse of the markets for asset backed commercial paper and structured investment vehicles.

The result is that provisions for loan losses, which have been at historic lows in recent years, will likely begin to rise at last, Mr. Aiken says in a research note titled “Out of the Frying Pan, Into the Fire.”

The Dundee Securities analyst’s advice is to be “market weight at best” on Canada’s banks, and investors should focus on the banks with the strongest capital positions.

Among the big six, Mr. Aiken favours Bank of Nova Scotia, which has an earnings base more diversified outside of North America than its rivals. Scotiabank is rated “outperform,” by Dundee with a $55 price target.