canadian banks

Lloyds Banking Group plc (ADR), $3.74, symbol LYG on New York (Shares outstanding: 16.7 billion; Market cap: $62.6 billion), is now majority owned by the U.K. government. Lloyds is cutting as many as 25,000 jobs as a result of its purchase of HBOS (Halifax Bank of Scotland) last year. This number could rise even higher as the complicated process of merging the two banks continues. Government ownership of Lloyds may slow its growth. The government may require the bank to hold more government bonds and push down their ratio of loans to deposits, which will hurt profits. However, it may also serve to stabilize the bank’s operations and make it more attractive to depositors....

TORSTAR CORP., $9.03, Toronto symbol TS.B, rose 40% this week. That’s because the company reported greatly improved results. In 2009, Torstar earned $35.6 million, or $0.45 a share. That’s a big improvement over the $158.7 million, or $2.01 a share, it lost in 2008. However, the 2008 results included a $136.9-million writedown of Torstar’s 20% stake in CTVglobemedia, which owns the CTV television network, several specialty-TV channels and The Globe and Mail. If you exclude all unusual items, per-share earnings fell 4.3%, to $0.66 from $0.69. That beat the consensus earnings estimate of $0.64 a share. Torstar’s 2009 revenue fell 5.4%, to $1.45 billion from $1.53 billion. Revenue at the newspaper division (which accounts for 66% of Torstar’s total revenue) fell 9.7%. However, revenue at the Harlequin book-publishing division (34% of revenue) rose 4.3%....

We recommended five newly issued bank preferreds in our February 2009 issue. The big five Canadian banks issued these preferreds on especially attractive terms to attract investors in a time of weak stock markets. Despite rising over 10% in price, their yields are still high. As well, holders can reset the dividends at higher rates in 2014 if interest rates rise. However, the banks have the right to buy back all five shares at $25 each in 2014. In that case, you’d have a capital loss if you bought them at today’s prices. The banks may choose to buy them back if interest rates stay low and bank credit quality remains high. That would let them issue new preferreds at lower rates. All five preferreds are worth holding, but we don’t recommend them as buys at today’s prices....

Last week, the Persian Gulf nation of Dubai asked creditors of state-owned conglomerate Dubai World for a stay in payments on its roughly $60 billion U.S. of debt. The news raised fears that the country could eventually default on its debt, and caused a drop in world stock markets. Asian and U.S. banks were particularly hard hit. Like their international counterparts, Canadian bank stocks initially declined when the story of Dubai’s debt problems broke. But they quickly recovered, mainly because investors realized that the big-five Canadian banks are much better insulated from the problems in Dubai than many of their Asian, European and U.S. counterparts....

BANK OF MONTREAL, $43.80, Toronto symbol BMO, earned $358 million in its second quarter, which ended April 30, 2009. That’s down 44.2% from $642 million a year earlier. Earnings per share fell 51.2%, to $0.61 from $1.25, on more shares outstanding. If you exclude writedowns of securities it holds and severance costs related to the layoff of 1,100 employees, the bank would have earned $0.91 a share. That beat analysts’ forecasts of $0.90, and the stock gained over 5%. The recession forced Bank of Montreal to set aside $372 million for bad loans in the latest quarter, up 146.4% from $151 million a year earlier. Still, that’s down 13.1% from $428 million in the first quarter. Moreover, the staff cuts, which amount to 3% of the bank’s total workforce, should save at least $118 million a year....

MANULIFE FINANCIAL $20.15 (Toronto symbol MFC; Shares outstanding: 1.5 billion; Market cap: $30.1 billion; SI Rating: Above-Average) sells life and other forms of insurance, as well as mutual funds and investment-management services. Manulife operates in 19 countries and territories worldwide, and adminsters $385.3 billion in assets. In the three months ended September 30, 2008, Manulife’s earnings fell 52.7%, to $503 million, or $0.34 a share, from $1.1 billion, or $0.70 a share a year earlier. Sharp global stock-market declines reduced earnings in the latest quarter by $574 million. As well, losses due to exposure to defaulting issuers in turbulent credit markets totalled $253 million. This included losses on investments with Lehman Brothers ($156 million), AIG ($32 million) and Washington Mutual ($4 million)....

Canadian life-insurance stocks are down lately on investor concerns that the economic slowdown will continue to hurt their profits. As well, insurers use gains on their bond and stock holdings to cover future claims and to make up underwriting losses. They have suffered as the values of these securities have fallen, along with credit quality and stock markets. Manulife Financial has recently raised a substantial amount of capital, which will help it cope with the current downturn. It also gives it the flexibility to make acquisitions at bargain prices, especially from troubled U.S. insurers....

Canadian banks have recently issued new preferred shares to raise capital. To attract investors in a time of weak stock markets, they’ve issued these preferreds on especially attractive terms. The preferreds pay dividends that give them yields of 6.25% to 6.50%. That’s higher than current Government of Canada long-term bond yields of 4% or so. What’s more, preferred dividends are treated the same for tax purposes as dividends from common shares. So, after-tax yields on preferred shares are actually as much as 43% higher when you factor in the Canadian dividend tax credit....

CANADIAN IMPERIAL BANK OF COMMERCE $49 (Toronto symbol CM; Conservative Growth Portfolio, Finance sector; Shares outstanding: 380.8 million; Market cap: $18.7 billion; Price-to-sales ratio: 1.5; SI Rating: Above average) is down 37.6% from its recent peak of $78.48 in May, 2008....

Many of our recommendations have dropped sharply in the past few months, along with the overall market. Here are 10 stocks that we feel have strong rebound potential in 2009. CANADIAN IMPERIAL BANK OF COMMERCE $49 (Toronto symbol CM; Conservative Growth Portfolio, Finance sector; Shares outstanding: 380.8 million; Market cap: $18.7 billion; Price-to-sales ratio: 1.5; SI Rating: Above average) is down 37.6% from its recent peak of $78.48 in May, 2008. That’s mainly because it has the most exposure to the problems in the U.S. mortgage market among the big five Canadian banks. CIBC has taken substantial writedowns in the past year, which should cover most of the damage. It also continues to expand its retail banking operations, as well as scale back its riskier operations. CIBC is a buy....