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(Reuters) - Barclays Capital upgraded the Canadian banking sector to "positive" from "neutral," saying it expects a strong second quarter for the banks as the economic recovery takes hold.
The brokerage said declining provision for credit losses in the near term and volume growth, coupled with widening margins, will fuel additional growth in 2011.
The combination of near-term defense and accelerating growth through 2011 justifies a strong valuation, Barclays said, adding that the recent pullback in share prices provides an attractive entry point before the second-quarter earnings.
"With our softening stance on trading revenues, we no longer believe that they will be a material drag on earnings growth," the brokerage wrote in a note to clients.
Barclays upgraded Bank of Montreal to "overweight" from "equal-weight," and Royal Bank of Canada to "equal-weight" from "underweight."
"While we do not believe that dividend growth will occur for some time, investors are still generating an enviable income stream with very little risk of dividend cuts," the brokerage said. It added that international focus has shifted to the Canadian banks based on their stability and current earnings strength.
Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Anne Pallivathuckal