August 4, 2009 / 1:13 PM / in 8 years

UPDATE 1-Canadian banks face risk from poor job mkts - Blackmont

Aug 4 (Reuters) - Canadian banks face a substantial risk to future credit performance from the stressed job markets in the United States, and to a lesser extent domestically, and their loan-loss provisioning levels appear ill-equipped to absorb it, Blackmont Capital said.

Toronto-Dominion Bank TD.TO and Bank of Montreal BMO.TO may deliver double-digit negative total returns as their above-average U.S. credit exposures will weigh on valuation for the foreseeable future, analysts Brad Smith and Richard McCormick said in a note.

They, however, raised their price targets on six Canadian banks, including Royal Bank of Canada (RBC) RY.TO, and said RBC and Bank of Nova Scotia BNS.TO offer the most appealing combination of future growth and current capital stability.

Despite their price target increases, the analysts maintained their cautious outlook for credit in the near term, and for bank equity valuations in the medium term.

“Our cautious stance reflects the continuing high level of uncertainty with respect to the timing of a recessionary bottom and the elevated risk of an extended period of lethargic economic activity,” the analysts said.

Beyond the credit-related challenges, they see the need for a substantial rethink of domestic bank business models to reflect and better align future activities with a more stringent regulatory capital regime and a lower acceptable financial leverage environment going forward.

For alerts, double-click [ID:nWNBB8403] (Reporting by R. Manikandan in Bangalore; Editing by Gopakumar Warrier)

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