Monday, January 14, 2008

Odlum Brown Rates Banks as 'Buy'

Financial Post, Duncan Mavin, 14 January 2008

Canadian banks, whose stocks have performed relatively well through the global credit crunch, are well-positioned to take advantage of the shakeout from the market turmoil, according to Murray Leith of Odlum Brown. The bank stocks should remain a core position in investor portfolios and Odlum Brown rates the entire sector “buy,” he said.

“We remain optimistic regarding the outlook for our economy and Canadian bank stocks in particular,” Mr. Leith told clients in a note. “Fiscally, the country is on solid footing with budget and trade surpluses. Demand for Canadian resources will likely remain buoyant. The Canadian housing market is still healthy and unlikely to experience U.S. style mortgage problems. Canadian banks were far less aggressive in introducing innovative and higher risk lending products. Also, speculative activity in the Canadian real estate market has been less pronounced.”

Mr. Leith pointed out that while Canadian bank stocks are down an average of 19.9% from their 52-week highs, major U.S. banks are down an average of 31.5%, while some of the larger U.K. and European banks are down an average of 32.9% from their 52-week highs.

Widening of credit spreads could see the Canadian banks pick up more business, giving a further boost to their stocks in the long term.

Also, the Canadian banks continue to be dividend machines. “The average bank yield (not including National Bank because we haven’t tracked its yield historically) of 4.3% currently represents more than 110% of the 10 year Government of Canada bond yield of 3.9%,” Mr. Leith noted.

Canadian Imperial Bank of Commerce, whose shares have been hit hard because of its subprime woes, will be the best performing stock in the next twelve months, Odlum Brown forecasts. Longer term, however, Toronto Dominion Bank is favoured because of solid leadership, a strong domestic retail franchise, and a solid U.S. growth plan.

“If we had to pick just one bank to own for the next ten years, it would be TD,” Mr. Leith said.