Credit Suisse’s Mike Rizvanovic called the second quarter for large Canadian lifecos “decent,” featuring “solid” results that exceeded his expectations, leading to a “modest” share price rally.
In a research note released Tuesday, the equity analyst pointed to a trio of notable trends stemming from earnings season.
* “Another strong quarter” for their Asset Management business, featuring “solid” sequential growth for both Manulife Financial Corp. (MFC-T) and Sun Life Financial Inc. and a “modest” profit for Great-West Lifeco Inc.
* “Stable” growth overall for the less volatile state-owned enterprise (SOE) sector.
“Outsized” results from the U.S. segments for Great-West and Sun Life.
“After accounting for those and other nuances in the quarter that drove the outperformance, our 2022 EPS estimates increase by a modest 2 per cent for the group, on average,” said Mr. Rizvanovic.
However, he cut Manulife Financial Corp. (MFC-T) to a “neutral” recommendation from “outperform,” pointing to “the adverse impact” of its IFRS 17 transition and continued underperformance in its Canadian business.
“The changeover [to IFRS 17] will be particularly impactful to MFC given the company’s accelerating new business gains that have been reported in recent years,” he said. “We estimate that the establishment of the contractual service margin under the new accounting standard at the beginning of 2023 will reduce MFCs common equity by as much as 16 per cent, while run-rate core earnings as currently defined by management will decline by as much as 12 per cent.”
“MFCs Canada segment has trailed the peer group materially over the past couple of years in terms of core earnings progression, which we believe tends to fly under radar. Part of MFCs underperformance can be explained by legacy assets that will continue to diminish in importance over time, which speaks to the broader issue around the company’s sizable constant headwind around capital allocation..”
Mr. Rizvanovic maintained a $27 target for Manulife shares. The average target on the Street is $29.90, according to Refinitiv data.
Concurrently, he raised his Sun Life Financial target to $72 from $71, topping the $71.93 average, with an “outperform” rating.