Monday, January 21, 2008

Financial Sector Fell 3.9% on the TSX

Financial Post, Duncan Mavin, 21 January 2008

The best of Canada's financial stocks were dragged into the global stock market sell-off yesterday as panicked investors ditched just about anything for which they could find a buyer.

"In an environment like this people will sell what is saleable," said one Bay Street bank analyst.

Although financials fared better than most of the rest of the Toronto Stock Exchange, there was no hiding place for banks and insurers that are often regarded as a safer, quality bet.

Financial sector stocks fell 3.9% on the TSX, compared with a 4.2% decline in the S&P/TSX composite index.

Among the big losers were Royal Bank of Canada, Bank of Nova Scotia, and Toronto-Dominion Bank, which have all avoided the worst of the subprime meltdown that has dragged down financial stocks around the world.

RBC slipped 3.8% or $1.79, while Scotiabank was down 4.7% or $2.17 and TD fell 5.0% or $3.21. Canadian Imperial Bank of Commerce - whose stock has been battered recently by massive subprime charges and rumours of bigger losses to come - continued to slide, down 3.5% or $2.34, while Bank of Montreal was down 4.8% or $2.61.

Insurers Manulife Financial Corp and Sun Life Financial were also down - Manulife fell 2.4% or 88¢, and Sun Life sank 2.9% or $1.39.

Shares in banks and insurance companies are not usually as volatile as stocks in other sectors. But Canadian financial stocks have under-performed of late in part because of fears about ties to the U.S. subprime mess which has taken a huge bank out of the market capitalization of banks south of the border.

Most of the big Canadian banks - with the exception of TD - have announced significant subprime related writedowns that in total amount to more than $4-billion already.

But yesterday's sell-off of financials was largely "just a broader market move" and not a reflection of recent under-performance in the sector, said Blackmont Capital analyst Brad Smith.

"It is all based on rising awareness of the risk of a U.S. recession and a growing appreciation of the potential order of magnitude of what we might be facing," Mr. Smith said.

Fears about the U.S. economy have been "crystallized" by last week's announcement of the Bush fiscal rescue package, he added.

"This move is just the market catching up with the fundamentals," Mr. Smith said.

Investors are likely also concerned about the impact of a U.S. recession on banks such as RBC and TD, as well as insurers Sun Life and Manulife, which have extensive operations in the U.S.

"I've for some time been leaning toward the idea that we would see a credit correction spread beyond subprime in the U.S. and that is increasingly being shown to be a risk factor," said Blackmont's Mr. Smith. "To the extent you have significant credit exposures in the U.S. I think there are going to be some bumps in the road."