Tuesday, October 07, 2008

RBC CM Lowers Earnings Estimates & Target Prices

  
RBC Capital Markets, 7 October 2008

RBC Capital Markets has lowered its 2008 and 2009 earnings estimates and target prices for the financial services stocks it covers to reflect the deteriorating macro environment, namely weak equity markets, increases in short term funding costs, the deterioration in the health of the U.S. financial services system and continued deterioration in the U.S. economy (which increases the odds of the Canadian economy weakening). We maintain our negative bias for potential future earnings revisions.

We are lowering our investment rating on Manulife's shares to Sector Perform from Outperform to reflect a share price that has remained relatively strong in the context of a rapidly deteriorating macro environment. We believe that the market correctly perceives Manulife as a company that is well-positioned to navigate through the turmoil in capital and equity markets relative to peers, but the valuation gap is too large to ignore, in our view.

The fallout of the global financials crisis could lead to attractive buying opportunities for financial services companies that are well capitalized, well funded, and have manageable credit exposures. We believe that Manulife, Sun Life, Scotiabank and ING Canada are best positioned to take advantage of potential acquisition opportunities.

We would not rush to buy financial services stocks in spite of attractive valuations based on historical averages. The macro environment continues to worsen, with faster deterioration being witnessed in certain areas (equity markets, funding costs, access to liquidity for corporates). Valuations have declined and are attractive compared to "normal" valuation levels, but they are not that low compared to prior troughs.

• We see more near term risk in lifecos than banks as they are more affected by equity markets than banks, and the three big ones have more exposure to U.S. credit via their investment portfolios.

• Our favourite stocks are Industrial Alliance, Sun Life and ING Canada.

• The "look through the valley" names we would hold in addition to the those three stocks are Manulife, Scotiabank and TD Bank.

• Those three companies have attractive franchises and are well positioned to make acquisitions but we do not find their valuations attractive given the difficult macro environment.
__________________________________________________________
Financial Post, Eoin Callan, 7 October 2008

The likelihood of ongoing weakness in the financial sector is too great for any of the leading Canadian banks and insurers to be considered bargains at current share prices, according to RBC Capital Markets' Andre-Philippe Hardy. The analyst lowered his earnings estimates and target prices for large financial services companies across the board.

He said this reflected "the deteriorating macro environment, namely weak equity markets, increases in short term funding costs, the deterioration in the health of the U.S. financial services system and continued deterioration in the U.S. economy (which increases the odds of the Canadian economy weakening)."

In addition to lowerings his targets, Mr. Hardy said he has a "negative bias for potential future earnings revisions."

As part of the downgrade of the sector, RBC lowered its investment rating on Manulife's shares, no longer expecting the Toronto-based insurance company to outperform the sector. RBC said that even when taking into account acqusition opportunities, "the valuation gap is too large to ignore."

The fallout of the global financials crisis could lead to attractive buying opportunities for financial services companies that are well capitalized, well funded, and have manageable credit exposures, Mr. Hardy said. But he added: "We would not rush to buy financial services stocks in spite of attractive valuations based on historical averages. The macro environment continues to worsen, with faster deterioration being witnessed in certain areas (equity markets, funding costs, access to liquidity for corporates)."

It is "still too early to buy", according to RBC, though peering "across the valley" to a time when markets recover, it sees Manulife, Sun Life, Scotiabank and ING Canada emerging as winners from the ongoing consolidation in the sector.

The analyst warned of "more near term risk in (life insurance companies) than banks as they are more affected by equity markets than banks."
;