Is Now the Right Time to Buy Canadian Banks?

Even if Canada’s banks stage a relief rally and they have a reasonably strong first quarter, 2008 will likely be a difficult year due to rising credit provisions. That’s the opinion of Dundee Securities analyst John Aiken, who in a recent note, addressed the question many investors are asking these days: With the decline in valuations, is now the time to be buying Canadian banks?

Indeed, they have been trading down in sympathy with U.S. financials, but the capital markets have held up and Canada’s banks appear to have avoided much of the subprime-related chaos that has hurt U.S. banks, Mr. Aiken said.

So despite his projections for earnings growth to slow, he thinks current valuations are compelling for investors with a time horizon of at least three years, particularly when the banks’ relative dividend yields are considered. But there is also more downside risk to both the analyst’s estimates and the consensus than there is upside, he noted.

Mr. Aiken said:

Consequentially, despite strong capital levels and a much better relative outloook than the U.S. banks, we believe that there will be a better entry point into the banks later in the year.

He continues to like regional names like Canadian Western Bank [CWB/TSX] and Laurentian Bank [LB/TSX] the most, while pointing to Bank of Nova Scotia (BNS) and Royal Bank (RY) as the best defensive choices among the Big 6.

Comments

[Victhom:]

Banks start to look attractive again
ALLAN ROBINSON

Globe and Mail Update

February 4, 2008 at 8:07 AM EST

Canadian stock markets have gotten off to a slow start this year, but it might be time to look for a recovery, especially if the U.S. recession is mild.

One of the places to start could be the Canadian banks, strategists say.

WHAT ARE THE EXPECTATIONS?

"Picking up banks is not aggressive," said Andrew Pyle, an investment executive at Scotia Capital Inc. "It's simply getting back to a sense of normal."

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The domestic banks are being tarred with the same brush as U.S. banks, Mr. Pyle said. "The bulk of the hit has been psychological. The fundamentals in Canada are not that bad."

National Bank Financial Inc. recently lifted its weighting on the Canadian financials to "market weight" from "underweight." The group has declined 12 per cent since the U.S. stock market peaked in October, which is a pullback almost equal to their typical loss in U.S. recessions.

"This development, coupled with the fact that Canadian bank dividend yields are now above 10-year government bond yields for the first time in at least 35 years, leads us to lift our underweight," wrote Clément Gignac, chief economist and strategist for National Bank and Pierre Lapointe, assistant market strategist, in a report to clients.

The yield on 10-year Canadian government bonds was 3.81 per cent late last week. The yields on the Canadian banks (dividends also have an income tax advantage over interest) were 3.9 per cent for Royal Bank of Canada, 3.3 per cent for Toronto-Dominion Bank, 3.9 per cent for Bank of Nova Scotia, 4.85 per cent for Bank of Montreal and 4.8 per cent for Canadian Imperial Bank of Commerce.

Catching the bottom can be profitable. "In seven of the last eight [U.S.] recessions, the best time to buy stocks was just as the economic data were at their worst," said Robert Kavcic, an economist with BMO Nesbitt Burns.

2008 Feb 08 12:39 PM

[Victhom:]

Royal Bank (RY) and Manulife buying back shares...it's better than US Banks who are "DILLUTING Shareholders....with Financing...in Canada our banks are well run...in US...Gambling in town with CDO..SIV...and more crap...LOL Read

Manulife Financial and Royal Bank buyback shares – Insiders
Posted: February 08, 2008, 10:00 AM by Jonathan Ratner
Market Call, SEDI
Astral Media, Manulife Financial, Royal Bank, Stantec and TransCanada are included in this report.


Insider transactions filed on Feb. 7, 2008
Source: SEDI

Astral Media Inc. bought back 286,100 shares between Jan. 16 and Jan. 31, 2008, bringing its holdings to 5,451,039 shares.

Manulife Financial Corp. bought back and cancelled 2,896,300 shares between Jan. 4 and Jan. 31, 2008.

Royal Bank of Canada bought back and cancelled 11,020,000 shares between Jan. 3 and Jan. 16, 2008.

Stantec Inc. bought back and cancelled 112,400 shares between Jan. 17 and Jan. 24, 2008.

Sean McMaster, executive vice president at TransCanada Corp., exercised 33,000 options for company shares at prices ranging from $20.58 to $22.33 on Feb. 7, 2008. He sold these shares the same day for prices ranging from $39.25 to $39.72, bringing his holdings back to 3,950 shares.

2008 Feb 08 12:41 PM

[Victhom:]

I will stick with RY and BNS because Laurentien and western are small player and Laurentien is only present in Quebec and economy of only one province can bring more risk....

my first pick is RY because RBC is the strongest with over $300B cash and RBC would be wize to boost market share in Asia....India and US....during the storm...I guess Nixxon is a smart CEO and will bring RBC to a new level.....The only thing we ned in Canada is remove regulation that preventing Merger between our banks and Insurances companies....Imagine MFC with CIBC or RY or PWF with MFC or RY with BMO....or CIBC with NA...etc...
10 large financials insititution for a market of 25M is a bit too much right Mr Flaherty???

2008 Feb 08 12:50 PM