BNS Upgrade Scotia Capital’s Meny Grauman thinks the outlook for Canadian lifecos remains stable heading into second-quarter earnings season “as investors continue to balance near-term solid operating performance against a longer-term outlook for rates.”
In a research report released Monday, the analyst said he expects earnings to be flat from the first quarter and up 7 per cent year-over-year, which he attributes to “a resilient operating environment and ongoing solid credit experience that continues to stand up to the pressures of the global pandemic.”
“While the backdrop for rates was constructive in Q1, yields dropped in Q2 as investors have begun to question the strength of the post-pandemic recovery and the prospects for a sustained rise in inflation,” said Mr. Grauman. “Interestingly, as Manulife’s Q1 results illustrated very clearly, the prospect of a sustained rise in rates may be good for lifecos in the long run but the implications can get more complicated in the short run.
“Looking out to the approaching reporting season we continue to forecast steady and consistent results with an emphasis on execution, especially for GWO which is busy integrating its MassMutual acquisition (a job that is soon to get bigger with the addition of the Prudential retirement services business early next year), and for IAG which continues to integrate its IAS vehicle warranty business in the US in an environment where auto sales are quite volatile given supply constraints.”
Mr. Grauman tweaked his target prices for lifeco stocks. His changes were:
- Great-West Lifeco Inc. ( “sector perform”) to $40 from $38. The average on the Street is $39.22.
- IA Financial Corporation Inc. (“sector outperform”) to $88 from $84. Average: $80.89.
- Manulife Financial Corp. (MFC-T, “sector perform”) to $28 from $27. Average: $29.17.
- Sun Life Financial Inc. ( “sector outperform”) to $77 from $74. Average: $71.36.
“Despite the recent dip in yields, we remain constructive on the sector, but still see more upside for the banks longer term. Among the names we cover we continue to highlight IAG as our top pick in the space even though valuation is not quite what it was this time last year,” he said. “Despite year-to-date outperformance the firm is only trading at 1.2 times book which is in line with its historical average despite significant strategic advancement in the U.S., and a very strong capital position which is helped by very impressive internal capital generation and a very defensive reserving methodology. We also continue to like SLF which despite still trading at a significant premium to the peer average on a price-to-book basis, is very attractive in absolute terms with the company now trading at just under 10.0x consensus 2022. Manulife has been the worst-performing name since last quarter and we see less risk this time around given the drop in rates should help headline EPS and boost its LICAT ratio. That said, we note that tail risk remains the key issue for this name even after its recent investor day, and concern about the impact of IFRS 17 on book value remains front and center in particular. Finally, we continue to be constructive on SFC, a lagging name that has yet to enjoy the fruits of the recovery trade.”