Canadian Banks Stocks: Will the Rally Continue?

The recent rally in Canadian bank stocks is unlikely to continue for long, says Dundee Securities analyst John Aiken.

In a note to clients, Mr. Aiken said:

As with the previous financial sector rallies, global valuations will decline once negative headlines resume, most likely in conjunction with U.S. third quarter reporting.

We do not believe that Canadian banks will be immune and investors who have benefited from an overweight stance should sell into this rally and return to a modest underweighting by month's end.

Mr. Aiken told clients that Canadian bank stocks have enjoyed a wave of optimism, brought on by third quarter earnings released at the end of August that included lower-than-feared capital markets write downs – much to the relief of investors. 

As a result, since Aug 26, the S&P/TSX Financials index is up about 7% through Wednesday's close., compared with a loss of roughly 5% for the broader S&P/TSX Composite Index. The Financials index was down about 10 points to 1670 in Thursday morning trading.

The analyst said:

Despite the fact that several of the banks missed consensus expectations, the sector as a whole benefited from both CIBC and Royal Bank reporting significantly lower writedowns than had been anticipated.

He added that the recent exit of short-sellers that is helping drive bank valuations higher can also be attributed to the bailout – and likely nationalization –  of government sponsored enterprises [GSEs] like Fannie Mae (FNM) and Freddie Mac (FRE) in the U.S.

While he expects this positive sentiment toward the banks to continue short term, Mr. Aiken said negative headwinds against future growth will return, when the next round of earnings likely come in below consensus expectations.

The analyst said he remains concerned about the potential for loan loss provisions given the effect on greater economies of the ongoing U.S. residential real estate slow down. He also wrote that capital markets revenues will likely be depressed over the next few quarters due to the lack of activity and that net interest margins remain under pressure. Meanwhile, dividends are likely to increase only modestly – if at all – representing dividend growth still well below past year's levels.

Mr. Aiken continues to rank TD Bank (TD) and Royal Bank (RY) at the top of his coverage, tagging both with "buy" ratings. He continues to rate Bank of Montreal (BMO) his only "sell."

In the current environment, we advocate looking for strength and taking a defensive stance for those looking to allocate or shift capital within the banking sector. We believe that TD Bank [with a price target of C$71] and Royal Bank [with a price target of C$54] are the safest bets.

Comments

[Victhom:]

You are so right RY chart is "Very Bullish"

www.stockta.com/cgi-bi...

2008 Sep 12 09:45 AM