Defensive Strategy Still Best with Bank Stocks

U.S. government intervention has the sick financial system back on its feet, but the drastic measures are far from a cure, says John Aiken, Dundee Securities analyst. 

While the bail-out has alleviated matters near term and propped up the valuations of financial services stocks for the time being, Mr. Aiken says it does not solve the underlying problem: U.S. residential real estate prices.

The analyst said:

The U.S. government is buying time for the financial services sector to try to heal itself. However, unless significant changes are made to the proposal, which would delay implementation, there is no support for American consumers who are drowning in debt.

He also said that liquidity will still be hard to come by – even though inter-bank lending spreads have eased – because of lingering distrust amongst various lending institutions. As well, he reminded clients that the U.S. economy is still heading towards a consumer driven recession.

As for the Canadian banks, who have varying direct exposure to the United States, Mr. Aiken said provisions for credit losses will no doubt increase while earnings growth in 2009 will continue to be challenged. 

The analyst continues to recommend a defensive strategy regarding bank stocks, with Toronto Dominion Bank (TD) and Royal Bank of Canada (RY) his top picks.  He has a "buy" rating and C$71 price target on TD and a "buy" rating and C$54 price target for Royal Bank.