Financial Update

U.S. bailout no cure-all for Canada's banks

· TSX -181.78pts another triple digit loss as a continuing sell-off of commodity stocks more than offset a boost from the U.S. government's takeover of mortgage giants Fannie Mae and Freddie Mac
· Dow +290.43pts
· Dollar -.13c to $93.92US. Reuters)The Canadian dollar dipped against the U.S. dollar as renewed confidence in the U.S. financial sector following the U.S. government's takeover of the two biggest U.S. mortgage finance companies convinced investors to buy the greenback
· Oil +$.11 to $106.34US per barrel The main driver today and through the rest of this week will be Hurricane Ike. The market is going to zig and zag in response to each development," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.
· Gold -$1.60 to $797.60US per ounce

Financial Post

TORONTO -- Canadian bank stocks made some big gains on Monday after the U.S. government bailed out mortgage lenders Fannie Mae and Freddie Mac but a reversal of fortune could come quickly due to nagging economic concerns.

The bailout package is widely expected to improve the battered U.S. housing market, which has dragged down Canadian bank stocks due to fears of exposure, but the banks are not out of the woods yet as a slowing Canadian economy could force them to take on higher loan-loss provisions as people struggle to pay back loans.

The Toronto Stock Exchange's financial index jumped as much as 4% early on Monday to its highest in more than two months before retreating in the late afternoon.

"At this stage it's good news that parts of the credit market that have been struggling may get some relief. But I don't think that this is the end of the troubles we've seen in the credit market," said Kate Warne, Canadian market strategist at Edward Jones in St. Louis.

"The Canadian financials have been less exposed to some of the mortgage woes in the U.S. marketplace. As a result, this change in terms of how the mortgage market works in the U.S. has less of a positive."

Perhaps that is why the shares of Toronto-Dominion Bank, Royal Bank of Canada and Bank of Montreal all backed off the highs they reached earlier in the session.

On Sunday, the U.S. government decided to take control of the mortgage finance firms Fannie Mae and Freddie Mac in the latest of a series of emergency steps to help put a floor under troubled financial markets.

But it still may be too early to gobble up shares of Canadian banks given the continued pressure on profitability in the sector amid a slowing economy and credit markets that remain in turmoil.
The Canadian economy narrowly avoided a recession in the second quarter and the Bank of Canada took on a slightly more dovish tone last week when it highlighted concern that the U.S.

economy will not meet the 1.5% growth next year that the bank had forecast for it.

Still, signs of stability in financial markets have managed to provide a boost to shares of Canadian banks, most notably those that have U.S. investments.

"Signs of improvement in the housing market are positive for bank shares, in our view, especially those with exposure to the U.S.," RBC Capital Markets analyst Andre-Philippe Hardy wrote in a note to clients.

Of the Canadian banks with U.S. banking operations, TD Bank said in April that it had US$7.8-billion of mortgage-backed securities. Disclosure at other banks is not clear but Mr. Hardy suggests their holdings would be much smaller.

"The U.S. government's actions have positive implications for the valuation of those assets but we do not believe that the Canadian banks had taken meaningful earnings hit related to those earnings," he said.

Shares of BMO closed up 2% at $48.50 in Toronto, TD Bank shares were up 2.3% at $62.37, and Royal Bank shares were up 0.33% at $48.60.

© Thomson Reuters 2008