Analysis: Canadian bank stocks may make a cozy hideaway

Publie le 9 aout 2011

TORONTO (Reuters) - Canadian bank stocks appear to be a solid bet for investors looking for safety during the current market turmoil, offering rock-solid profits, high dividend yields and a history of outperforming during crises.

Royal Bank of Canada , Toronto-Dominion Bank and other lenders may slide further if the latest market rout drags on but are unlikely to tip as far as their international counterparts, said John Aiken, analyst at Barclays Capital.

Their strong domestic retail bank franchises and international diversity protect them against economic turmoil,

"While they will likely continue to be dragged down by U.S. financials, we believe that they will outperform on the downside and the upside, similar to 2008-2009," Aiken said in a note.

Previously criticized for their conservative lending practices and meager domestic growth prospects, Canada's banks had their day in the sun following the 2008 financial crisis.

Unlike major banks in Europe and the United States, no Canadian lender required a government bailout, and their stock valuations rebounded quickly from the crisis. All but two of Canada's "big six" returning to record highs in the past two years.

Royal and TD are Canada's largest lenders. The other big banks are Bank of Nova Scotia , Bank of Montreal , Canadian Imperial Bank of Commerce , and National Bank of Canada .

In the past two weeks, Canada's banks have outperformed the broader market as the benchmark S&P/TSX composite index was down 13.5 percent as of Monday's close, compared with an 11 percent drop for the bank-heavy TSX financials subgroup .

DRAWN TO DIVIDENDS

Their current levels represent a good entry point, says John Kinsey, a portfolio manager at Caldwell Securities in Toronto. He has steered clients toward their dividends, which are even more attractive following the recent stock decline.

The big six are yielding between 3.7 percent and 5.1 percent as of Monday's close, which is more than long-dated Canadian government bonds, and far above the 2.4 percent currently offered by the benchmark 10-year U.S. treasury.

"We just can't provide (clients) with enough income if we go to bonds," he said. "The banks are way more attractive, so this is where we put our money."

While the banks' valuations have suffered from their link to the financial crisis, the Canadian lenders do not have unreasonable exposure to U.S. bonds or troubled European debt.

"The valuations have come down significantly, yet the industry is very marginally exposed to the problems that the world is facing on a direct basis," said Tony Demarin, chief investment officer at BCV Asset management in Winnipeg.

"Once we start seeing bank earnings at the end of August, I believe it's going to light a fire under these institutions given that investors are going to find out that the fundamentals are still good."

($1=$0.99 Canadian)