08 June 2007

UBS Analyst Cautious on Financial Sector

Financial Post, David Pett, 9 June 2007

Given the current valuations in the Canadian financials sector, investors can hardly be blamed for considering the purchase of a bank or Lifeco's stock these days. But with higher interest rates looming alongside a red-hot loonie, UBS analyst Jason Bilodeau is cautioning investors to be selective in their choices.

Of course, what's tempting investors is the sector's attractive valuations which have only improved based on the financial sector's recent stock weakness. Year to date, the banks are down 0.8% while the Lifecos are up only 0.1% . That compares to the S&P/TSX which has advanced 6.2% over the same period.

Mr. Bilodeau is the first to admit that the present valuations could offer opportunities for investors, especially when you throw in the fact that fundamentals across the sector, particularly regarding the banks, have been sound through the last quarter.

That said, he maintained his neutral stance on the sector believing it still faces near-term pressure. As such he is focusing on key names to invest in with a 12-month view.

Those pressures, specifically, are the rising Canadian dollar and the increasing likelihood of an interest rate hike in Canada and in the United States.

“Lifecos tend to do better than banks with higher interest rates,” Mr. Bilodeau said, but any company in the sector, bank or Lifeco, he added, who has foreign operations, could be dragged down by the continued strengthening of the Canadian dollar.

Nonetheless, the analyst did mention a few companies for his clients to consider.

He highlighted Toronto Dominion Bank for its strong domestic platform, reduced uncertainties regarding TD BankNorth and its operating upside at TD Ameritrade.

He also said he likes Bank of Nova Scotia because of its improving domestic trends and superior mid-term growth prospects from its international operations.

On the Lifeco side, he considers Manulife Financial Corp. top of class.

"We believe Manulife offers one of the better operating outlooks in the industry with considerable excess capital to make acquisitions or grow dividends/buybacks.