Scotia Capital: Investing in Canadian BanksA summary from scotia capital, i though it was interesting:
"We do not believe investors will rush to put capital back into Financials until the full impact of the credit crunch becomes clear.
The only problem is that the fall out from the credit market continues to evolve and there is no return to normalcy expected in the near future. Many U.S. and global banks took substantial writedowns in the fourth quarter of 2007; however, most investors expect more writedowns are forthcoming in January and February as credit markets have deteriorated further, leading us to conclude that Financial stocks will continue to come under pressure during the first quarter of 2008 and almost certainly beyond. Canadian banks have shown that their exposure to riskier assets is not as severe as what has been revealed at U.S. and global financial institutions; however, the financial industry is a global industry, so investors tend to stay away from the sector as a whole regardless of geography. Therefore, whether justified or not, Canadian bank stocks will likely be restrained by the credit markets until confidence is restored. Since financials tend to make up a large percentage of many indices including the TSX, it is possible that some major exchanges worldwide will see little upward momentum in the first half of 2008.
On a more positive note, although investors may have painted all financials with the same brush, it is unfair to do so as some are far more exposed to U.S. subprime mortgages and questionable financially engineered products than others. Canadian bank’s exposure to high-risk assets is low with some exceptions such as National Bank’s (NB) exposure to non-bank sponsored asset backed commercial paper, Bank of Montreal’s (BMO) structured investment vehicles, and CIBC’s (CM) exposure to the U.S. subprime market and collateralized debt obligations. However, Scotia Capital bank analyst Kevin Choquette believes the exposure amongst these banks is manageable. We’d also note that TD Bank (TD), Royal Bank (RY) and the Bank of Nova Scotia (BNS) have either minimal or no exposure at all to these risky assets classes and thus should not be penalized to the same extent as their U.S. or global counterparts which has become evident in their current P/E multiples. Nevertheless, it is quite likely that Canadian banks will have little opportunity to rally until the credit market returns to some state of normalcy, which may not occur until the second half of the year. Investors holding those banks with little or no exposure to risky assets should continue to hold as the market will eventually differentiate the high quality Canadian banks from other financial institutions. As Scotia Capital’s bank analyst notes, Canadian bank profitability and capital levels are at all time highs, with low relative exposure to high-risk assets, diversified revenue mix, reasonable earnings growth outlook, low earnings volatility, ability to increase dividends and attractive valuation including high dividend yields, low price/earnings multiples, and low relative risk. Patience with Canadian banks should be rewarded later in 2008.
I have been asked recently "can the Canadian banks go lower in the near term"? The answer is yes, yes they can. I have been asked "should I be in a rush to get into the Canadian banks TODAY, for fear I may miss a rally in the next few months"? The answer is no.
I have been asked "considering current yields, shouldn't I be buying these banks if I'm looking for income"? The answer is, it depends on the investor. If you are investor who is looking for income, but is very concerned about capital preservation then the answer is no, because Canadian bank prices are going to continue to fluctuate and may move lower. If you are a longer term investor who is willing to put up with short term downside in order to be "paid to wait" with a higher than normal yield for a bank then I would say yes, but I would still direct you more towards the more stable TD, Royal and Scotia and I would continue to remind you that we're far from seeing an end to the woes of the credit market."
Food for thought guys/gals.
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