Odlum Brown Analysts: Canadian Banks Still a Buy

With leading Wall Street institutions caught in a death spiral, stock-pickers at Odlum Brown see hidden value in Canadian banks.

The analysts said:

It is easy to get the impression that the Canadian banks are struggling, with the stocks well off their highs” and a heightened focus on credit exposures, analysts at the firm said. But the reality is that the Canadian banks continue to have core businesses that are extremely profitable, especially compared to the U.S. and European peers.

In a research note to clients last week, the firm said:

Profits are simply down from exceptional levels experienced over the last couple of years.

The analysts point towards the steady earnings Canada’s big banks enjoy from their near-exclusive access to the country’s mature retail market.

The firm acknowledges that:

It is expecting somewhat slower growth from Canadian operations due to the economic slowdown that is underway, however, ooking forward, overall bank earnings are expected to remain robust.

When the blows from the credit crisis and one-off items are stripped out, the big six Canadian banks reported aggregate cash earnings last quarter of C$5.1 billion. This was 7% lower than the previous quarter, but down 6% compared to a year earlier.

The special charges taken by the industry also slipped below C$1 billion after hitting C$2.8 billion in the first quarter.

Despite the challenging environment, Canadian bank stocks have outperformed relative to the general market this year. The analysts calculate that bank stocks have lost value based on the “average total return” of the year-to-date, but not done as badly as the S&P/TSX Total Return Index, which has slid 8.0 %.

This, in the analysts' view, makes Canadian banks a buy.