GMP reviews financial services sector

Here is a cogent review on specialty FI stocks from the GMP Securities research team.

– Financial services stocks rebounded but still under performed the S&P/TSX Composite during the week, up 2.9% compared to 3.6% for the broader index; continue to trail on a YTD basis up 0.1% vs. a 4.7% increase for the TSX. Asset managers and specialty lenders were mixed on the week, while the banks and insurers performed the best. YTD, the best overall performing sector has been the life insurance group.

– We have learned over the last week that asset-backed commercial paper (ABCP) is a four-letter word when it comes to investing. The total lack of liquidity in the non-bank ABCP market in Canada is having serious ramifications for those companies that issued it, promoted it and more importantly invested in it. About once a day, companies are disclosing their exposure to this class of securities and almost immediately investors are paring off value to those companies with exposure. In our coverage universe, most have disclosed in some form the exposure they have but it appears that more is still likely to be disclosed.

– In the case of Xceed Mortgage Corporation (XMC-TSX), ABCP was an important funding source for the company. This source in all likelihood is closed to them indefinitely and this has put the risk level for XMC at an all-time high. As for others, Home Capital Group (HCG-TSX) has zero exposure at this time and we have not publicly heard any announcement from Equitable Group Inc.1 (ETC-TSX) or Quest Capital (QC-TSX) (although we suspect the exposure is minimal). This group will remain in the penalty box despite one view that competition in the mortgage space is diminishing and the best-in-class operators will have very good originations in the upcoming quarters.

– Overall, the market seems to have rebounded at least for now but we remain cautiously optimistic about investing in any company that is experiencing balance sheet pressure at this time. It is our view that the debt markets do not correct themselves as quickly as equity markets do in periods of concern.

MRM