Canadian Banks to Benefit from Fannie & Freddie Bailout

Bank shares in Canada should benefit from the Fannie Mae and Freddie Mac bailout, but it's still too early to buy, says RBC Capital Markets analyst Andre-Phillipe Hardy. 

Mr. Hardy said:

We continue to believe that it is too early to buy Canadian bank stocks, in spite of low price/earnings multiples and high dividend yields, reflecting our expectations for continued pressure on profitability due to both a slowing economy and credit markets that remain in turmoil.

He noted that he is watching four keys areas in order to pick a bottom in Canadian bank shares, including signs of credit market stress, housing market strength, employment growth and the price of oil.

He said recent moves in the price of oil have been positive, and the U.S. housing market, despite price declines, high inventories, rising foreclosures and slow sales, should benefit from a stable Freddie Mac and Fannie Mae. In fact, he expects a near term rally in bank stocks as a result of the bailout, especially those with exposure to the U.S., which include TD Bank (TD) , Royal Bank (RY) and Bank of Montreal (BMO). 

In Canada, meanwhile, the housing market trend is negative, he added. He also told clients that signs of credit stress remain because credit challenges have moved beyond just housing and employment growth, positive in Canada the past few weeks, remains negative in the U.S.