Monday, June 09, 2008

Dundee Securities has 'Sell' Recommendations on BMO, CIBC, & RBC

Canwest News Service, Keith Woolhouse, 9 June 2008

Two months after warning that more pain lay ahead for Canadian banks in the wake of their suspect loans and exposure to collaterized debts that stemmed from the downturn in subprime mortgages, Dundee Securities analyst John Mr. Aiken is advising investors to dump three of the Big Six.

Mr. Aiken has slapped "sell" recommendations on Royal Bank, Bank of Montreal and CIBC, their common shares no longer considered suitable as a long-term investment.

Mr. Aiken's recommendation comes one week after the banks, regularly eyed as a safe haven in troubled times, reported their second-quarter earnings, most of them with disappointing results.

Only TD Bank Financial Group and National Bank received "buy" recommendations. Scotiabank is rated "neutral."

All the banks have delivered over-the-top returns since bottoming out in mid-January. Bank of Montreal, the best, has soared 26.5% while Royal, the worst, has jumped 17.1%. Mr. Aiken believes shares of both will stagnate, if not worsen, over the coming 12 months.

TD and National are the only ones he expects to show continued improvement, both capable of returning 10%.

For the others, he sees bleak times as economic uncertainty persists. As we head into the summer months with consumer confidence plunging to a seven-year low, rumblings of the Canadian economy tilting toward recession, rising consumer debt, a tottering manufacturing sector, and the Tourism Industry Association of Canada warning that the tourism is "on the precipice of an unprecedented decline, which could have a massive impact on the 1.6 million Canadians whose jobs depend on the sector," it's not only bank stocks that could take the gloss off capital markets in coming months.

But for now, the focus is on the banks. Here is Mr. Aiken's assessment:

TD Bank

While disappointed with TD's earnings miss in the last quarter, Mr. Aiken was encouraged by the fact that the miss came from weaker capital markets, most notably the trading department, which attracts lower valuation multiples. Mr. Aiken rates TD his top pick going forward and has raised his 12-month target to $77 from $75. At $77, TD would be within 10 cents of its 12-month high, the best recovery in the banking sector and that warrants a "premium valuation multiple," says Mr. Aiken.

Trading at about $70, TD shares yield 3.4%. Price-to-earnings (P/E) ratio is 12.6.

National Bank

Credit where credit is due.

The knock against National is its higher exposure to volatile capital markets, its concentration in Ontario and Quebec, and its position in the non-bank asset-backed commercial paper market, although it expects to recover much of the losses there. Through all this, National thrives and trades at a significant discount to its peers.

Mr. Aiken has a "buy" recommendation, upped from "neutral," and jumped the 12-month target price to $60 from $52. At today's price of $54, National yields 4.6%. P/E is 18.2.


Mr. Aiken deems BNS's international segment one of its greatest assets, which puts it in an excellent position for longer-term growth, but he also considers it an "area of potential near-term concern."

Domestic operations, particularly the improving contribution from Scotia Capital, are encouraging. The risk lies in areas where BNS has exposure to the U.S. economy. Mr. Aiken sees little significant upside and while he has raised the 12-month share target to $49 from $46, that is not only well below the 52-week high of $53.52, but also less than today's price of around $51, at which price the shares yield 3.8%. P/E is 13.5.

Royal Bank

Royal's second-quarter numbers exceeded analyst expectations and drove up shares 2%. That may be a case of great expectations for the numbers were due to exceptionally strong trading revenues outside of write-downs "and the possibility does exist for incremental charges and we note that the bank's exposure to U.S. builder finance will likely result in further increases in (loan loss) provisions." Mr. Aiken contends that Royal retains a higher risk profile than the market is pricing in. "This reflects exposure to the U.S. economy, significant contribution of trading to overall revenues and the potential for additional write-downs." With limited upside in the near-term, Mr. Aiken is maintaining his "sell" recommendation and a $50 target, which is around where shares now trade for a 3.9% yield. P/E is 13.64.

Bank of Montreal

The market may have a sense of relief regarding BMO as it appears that balance-sheet issues may be waning. Mr. Aiken is not so sure. "Although second-quarter earning were a stark improvement over the first-quarter, the lower relative earnings quality makes it difficult to materially change our outlook. However, as focus shifts from the balance sheet to future earnings, we believe that the second quarter reflects some significant impediments, despite the strength of its domestic retail operations. We continue to believe that BMO's outlook remains quite challenging in the near-term." Mr. Aiken offers a slight encouragement, raising the 12-month target to $47 from $45, but that offers no upside from today's share price around $48 and 5.8-per-cent yield. His verdict: "Sell." P/E is 12.27.


The gloom deepens. "CIBC's writedowns may perversely be considered positive by some players in the market as a signal that we are close to the end - how much more could possibly be coming?" Mr. Aiken ponders. "CIBC's exposures could reasonably generate additional charges of up to $3.6 billion," and force it back to the market to raise additional common equity. The bank's decision not to pre-announce an unexpected $2.5-billion writedown in the quarter shocked him.

"We have to wonder if management is getting worn down by all of the losses as well as just investors."

No surprise, then, that Mr. Aiken figures CIBC shares will be worth $67 at this time next year, around a buck less than they're trading today. Massive writedowns have resulted in negative earnings-per-share of $2.43. For existing shareholders, the dividend yield of 5.1% offers some comfort. The P/E is invalid.