Tuesday, March 25, 2008

Scotia Capital Cuts TD Bank to Sector Perform

  
Scotia Capital, 25 March 2008

Event

• Downgrading TD to 2-Sector Perform from 1-Sector Outperform based on execution risk from the Commerce Bancorp (CBH) acquisition closing Mar. 31/08, strong relative share price performance in the past couple of years, expected slowdown in insurance earnings growth, market share declines in personal deposits and negative impact from appreciation of the C$.

What It Means

• In terms of the CBH acquisition, we are concerned about the value of its $26.5B securities portfolio and the potential for writedowns in the $1.5B range. We expect that the bank may have some discretion on approximately $1B of this potential writedown as it is in the Held-to-Maturity account. The dilemma is whether to take the full hit resulting in higher goodwill with higher future earnings or preserve capital. The share price could also be under near term pressure as TD share flow back into Canada maybe greater than index demand.

• Our 2008 and 2009 earnings estimates are unchanged at $5.95 and $6.70, respectively. Trimming share price target to $95 from $100. Our long term positive view on TD remains intact based on strength of its operating platforms.
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Financial Post, Duncan Mavin, 24 March 2008

Trying to guess the bottom of the slide in Canadian bank stocks? You are hardly alone.

But now is the time to get back in to those battered banks, says Desjardins Securities Research analyst Michael Goldberg.

“Valuations remain exceptional and we believe it is now time to begin accumulating,” Mr. Goldberg says in a note.

There will be more bad news out of the banks, which have announced massive subprime-related writedowns and are also facing the prospect of weakening results from operations thanks to the economic slowdown in the U.S.

But bank stock prices should be buoyed by a “a classic group rotation” last week that saw investors switch from oil and gas, gold and base metal stocks back to financials, following support from the sector from the U.S. Federal Reserve last week, Mr. Goldberg said.

Desjardins is upgrading Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada to “buy” from “hold.”

Toronto-Dominion Bank and Bank of Nova Scotia have not seen their stock prices hit as heavily as the peers and remain the top pick at Desjardins.
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