There seems to be a general lack of enthusiasm for Canada's Big Banks these days. Michael Goldberg, an analyst at Desjardins Securities, is the latest observer to voice some skepticism about their performance in 2011. Indeed, his order of preference for financial stocks puts the Big Banks in last place, behind diversified financials, insurance companies and small banks.
"Canadian banks had a solid run in 2010, with earnings recovering by 40 per cent year-over-year from depressed levels in 2009," he said in a note. "We expect earnings growth to decelerate to about 20 per cent in 2011 and 6 per cent in 2012." That could result in merely "stable" stock prices.
On the other hand, he's very upbeat about diversified financials – a group of stocks that can't be classified as either banks or insurance companies. Brookfield Asset Management Inc. (full disclosure: I own this stock) is his top pick: "Though we expect interest rates to increase, we are still living in a relatively low interest rate environment, and we believe that BAM is best positioned to further benefit from the current environment."
He's also bullish on life insurance companies, whose performance has been dismal relative to the banks' since the financial crisis. However, higher bond yields – driven up by U.S. economic stimulus measures – rising interest rates and a recovering stock market should change that.
"Therefore, we believe that investors should favour stocks that have higher betas and greater interest-rate sensitivity, and with that line of reasoning, we prefer to be in the lifecos over the banks," Mr. Goldberg said.
If you insist on investing in banks, he prefers the smaller names, such as Canadian Western Bank and Laurentian Bank of Canada , which he believes have better performance potential.
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David Berman