07 December 2006

UBS Says Canadian Banks are No Bargain

Financial Post, Duncan Mavin, 7 December 2006

In contrast to other international bank stocks that are currently underpriced, there's not much room for growth for Canada's bank stock valuations, said UBS investment research in a note on international banking trends for 2007.

"For global banks we see valuation upside potential of 16%," said UBS. The Swiss bank said it is overweight international bank stocks on the basis that current prices put too much emphasis on the impact of an economic downturn on bank earnings.

However, UBS had a less positive investment view for the big Canadian banks' stocks, saying valuations are "full."

UBS's Toronto analyst Jason Bilodeau said the Canadian banks will face moderate loan growth compared to recent highs, as well as "challenging" deposit trends due to low industry-wide growth and high levels of competition.

Mr.Bilodeau highlighted several other key trends in Canadian banking.

A "broad economic slowdown" in the North American economy should lead to a better interest rate environment for the banks, while historically low credit costs should continue into next year.

He also said the banks could buy back more shares and increase dividend payouts next year, especially in light of the recent clampdown on income trusts which has increased demand for sources of yield.
Financial Post, Duncan Mavin, 7 December 2006

Investors hunting the next hot M&A sector should take a look at sub-prime and non-standard lenders that have carved out a profitable niche on the margins of Canada's financial services industry, said Sprott Securities Inc. analyst Jason Donville in a note.

"As we look into 2007, we believe that virtually all of the [non-standard] lenders we follow are on someone's radar screen," said Mr. Donville. "Let the M&A fireworks begin."

Sub-prime and non-standard lenders have made good business out of serving customers that can't borrow from traditional lenders, like the big banks, which have rigid credit practices. Their customers include immigrants with no credit history, or self-employed entrepeneurs who don't fit the lenders' mold.

But bigger institutions have recently shown their appetite for a share of the non-standard pie. Sub-prime auto lender VFC Inc. was bought by Toronto-Dominion Bank in February, while another auto-loans company Travelers Financial Group was bought by Bank of Nova Scotia in November.

Scotiabank also acquired non-standard home loans company Maple Financial Group Inc.

But Mr.Donville said those deals are just the start. "We expect that M&A activity in the non-standard lending space will be even better in 2007 than it was in 2006," Mr. Donville said.

"Investors who can figure out in advance which ones have the highest probability of a takeout will be rewarded."

Mr. Donville said among those "priced attractively to be taken out" are Equitable Group Inc. and Xceed Mortgage Corp. -- both providers of home financing -- as well as Carfinco, which lends to customers who want to buy second-hand cars.