Interesting article!
For Friday, October 1, 1999
Bank stocks poised to recover
By STEPHEN MILES
The Financial Post
ÿÿCanadian bank shares, Bay Street's much-maligned dogs of 1999, are poised to bite back.
ÿÿAfter five months of shocking underperformance tied to rising interest rates and poor market sentiment, the Toronto Stock Exchange banks & trusts subindex is down almost 25% from its recent high of 10,088 on April 12. But some market watchers believe the banks have fallen about as far as they can go and offer compelling arguments for a big rebound.
ÿÿMurray Leith, director of investment research at Odlum Brown Ltd. in Vancouver, says the climate for banks should improve as the U.S. Federal Reserve's tighter monetary policy slows economic growth and interest-rate worries wane. "That will set the stage for an impressive rally in bank stocks," he says. "We foresee upside of more than 55% for the group over the next 12 to 18 months."
ÿÿMr. Leith cites strong profit growth, attractive dividend yields, high return on equity and low valuation levels as reasons to buy bank stocks. Canadian rates are no higher than they were when the banks & trusts subindex was at its record peak of 11,694 in April, 1998, yet the subindex is down 35%. Bank stocks also are cheap. The subindex is valued at about 10 times trailing 12-month earnings, down from a high of 16 times in 1998.
ÿÿ"With high returns on capital and plenty of scope for further cost cutting, sector profits should continue to rise at about 10% a year," he says.
ÿÿMr. Leith likes Bank of Nova Scotia (BNS-T) with a target price of $48.75, Bank of Montreal (BMO-T) with a $79 target and Toronto-Dominion Bank (TD-T) , aiming at $44.50.
ÿÿAndrew Martyn, vice-president and portfolio manager at Davis-Rea Ltd., agrees that banks look "cheap across the board." Growing dividend yields of 3.5% to 4% and a likely expansion in multiples are good reasons to buy back into the group. Over the past five years, Canadian banks have lifted their dividends at an annual average rate of 12%, which has contributed to rising valuations.
ÿÿ"If someone pays 25 times [earnings] for the TSE 300, why wouldn't they pay 14 times for a bank?" he says. "Take Bank of Montreal, for example. At 14 times earnings of about $5.50 a share next year gives you a target price of $77. That's more than 50% upside."
ÿÿMr. Martyn likes TD, Bank of Montreal and Royal Bank. "For those with the stomach for a little volatility TD is best," he says.
ÿÿTD's upside potential outweighs the downside risks, he says. The bank has been hurt by its brokerage unit, TD Waterhouse, which has lost 60% of its value. Excluding TD Waterhouse, the bank's core assets are trading at about nine times earnings.
ÿÿ"The risk-return is spectacular. On the downside you could probably, at most, lose $4 in TD Bank stock and on the upside if TD Waterhouse trades back to where it was in the IPO you are going to have up to an $8 boost from TD Waterhouse alone," he says. |
