(Reuters) - BMO Capital Markets upgraded the Canadian banking sector to "outperform," saying valuations of Canadian banks are getting increasingly attractive compared with other yield-orientated equities such as REITs and utilities.
Bank yields relative to government long bonds have reached similar levels as during the financial crisis, reflecting the dramatic decline in bond yields, analyst John Reucassel said.
Reucassel said he favors banks over life insurance companies despite the attractive valuation of lifeco shares because of the challenges that life insurers face in volatile equity markets and their low long-term interest rates.
"Banks are expected to continue to raise dividends while lifecos are not expected to grow dividends," Reucassel wrote in a note dated June 20.
Canadian banks, however, continue to face risks from Europe's debt crisis and high Canadian consumer leverage, the analyst said.
"These risks are manageable but share prices are likely to remain volatile," Reucassel said.
Canada's conservative banking sector faces profit pressure at home as slowing domestic loan growth and narrowing lending margins threaten the double-digit profit gains.
Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Supriya Kurane