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RBC Analyst: Long Toronto-Dominion Bank; Short Bank of Montreal

by: FP Trading Desk September 19, 2008 | about stocks: BMO / TD    

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Here’s a pair trade idea some have surely considered - long Toronto-Dominion Bank (TD) and short Bank of Montreal (BMO). Andre-Philippe Hardy at RBC Capital Markets thinks this approach could add value if the market is rising or falling.

Mr. Hardy said:

[It is] an opportunity to add value in an uncertain environment for short term direction in bank share prices.

The analyst noted that TD currently trades at the same price-to-book multiple as BMO, and at just a 0.5 times premium on a forward price-to-earnings basis. He told clients that TD’s premium should be higher, given its better business mix, fewer near-term credit concerns, a stronger and faster-growing domestic franchise and fewer capital market headline exposures.

Mr. Hardy said in a research note:

These more than offset a lower capital position than BMO.

However, the analyst has not changed his view that it is too early to buy Canadian bank stocks, given the expected pressure from a weakening economy, turbulence credit and capital markets.

Mr. Hardy noted that:

[These are] valuations that are not overly cheap on a historical basis, considering the challenges we think the banks will face.

Mr. Hardy rates TD “sector perform” with a C$69 price target and BMO “underperform” with a C$44 target.

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