Desjardins Raises Bank and Lifeco Price Targets

Still very concerned about the economic outlook and credit risk, Desjardins Securities analyst Michael Goldberg, nonetheless raised his bank and lifeco price targets based on improvements in liquidity risk.

"Investor optimism has increased as 'green shoots' have sprouted," Mr. Goldberg said in a note to clients. "In our view, all of the improvement has been in liquidity."

He said the narrowing spread of long corporate bonds over long Canada bonds over the past two months reflects a significant decrease in liquidity risk, which has been much more intense in this cycle than previous ones.

We believe that the green shoots that we have seen all reflect abating liquidity and equity risk. Green shoots pertaining to the economy and credit risk are minimal as employment and house prices continue to fall.

In light of narrowing spreads, Mr. Goldberg reduced his long corporate bond yield forecast to 6.25% and increased his bank and lifeco target prices, which were previously based on a long corporate yield of 6.75%.

He wrote:

This reduction in the projected long corporate bond yield add[s] 8% across the board to our bank target prices (less for TD as we hold the projected value of its investment in Ameritrade steady). For the same reason, we are also increasing our lifeco target prices by 8% across the board.

Given the banks are more sensitive to credit, Mr. Goldberg said he prefers the life insurance companies over the banks.