The Outlook for Canadian Financials (Bob Decker)

Dynamic/Aurion's Bob Decker discusses which sectors of Canadian financials have the best prospects.

Dierdre McMurty interviews Bob Decker, of Dynamic Funds, who in 1996 founded Aurion Capital, which today manages pension assets of $5-billion.

DM: Bob, we're going to talk today about your outlook, and your views on the Canadian Financial sector, but, can you begin by giving us an overview of the environment that the sector operates in?

Bob Decker: Well, currently we're in a recovery in the financial sector that is fairly well extended. The recovery in the consumer has occurred, we've written off a lot of the bad loans in the past cycle, but, the mortgage
market has expanded dramatically in Canada, and that I expect to actually plateau this year. And banks are now
looking to make commercial loans their focus in the upcoming year.

DM: Where do you see the incremental earnings growth coming from then for the banks?

Bob Decker: As I said in the commercial area, the broadening, the expansion of the economy, banks are now going to focus on that as their driver, and it looks to me that that's both in the U.S. and Canada; there's many
opportunities to take advantage of the expansion.

DM, Now, within the fund, one of your top holdings the end of December 2010, was TD [Financial Group]. What is about TD that particularly attracts you? What do you like about it?

Bob Decker: Well, TD has executed an expansion to the U.S. and with almost I think a flawless execution. They've created a footprint in the Northeast U.S. that's now ready to benefit from the recovery in the U.S. consumer, and commercial markets. In addition, they have just made a recent acquisition in the Auto Finance area, that I think will provide them a platform of growth in the next few years.

DM: Alright Bob, so now we know how you feel about TD Bank, what about some of the other Canadian Banks?

Bob Decker: Well, we are very encouraged by the acquisition of Marshall and Isley, by Bank of Montreal. They had a small footprint in the Chicago area, but they needed to scale that business. We're looking at that very carefully right now as a potential driver, because as I said before, the U.S. market is where we think the growth will be superior, and I think, if they execute well this is a great acquisition opportunity for them.

DM: Any others?

Bob Decker: We're downweighting our interest in the CIBC lately because they've benefited from the recovery of the consumer, and that's now reflected in their share price.

DM: Another area where you're active in the financial sector is the asset managers. How are you investing in asset managers? What's the rationale?

Bob Decker: There are a number of unique opportunities in asset management in Canada. Both in financial assets and private equity assets such as the likes of Onex and Brookfield. There are also opportunities in the non-bank financials in the brokerage area that we're quite interested in. These are low risk financials because they have large free cash flow and they don't have financial leverage like the banks do.

DM: The large insurance companies have certainly made headlines the last couple of years. What's your perspective?

Bob Decker: Life companies generated a lot of negative press the last couple of years because of their sensitivity to a decline in the stock market. Now, if it has recovered, they will have recovered as well. But theres a lot of sensitivity to the earnings growth that they use to have because they've had to deploy a lot of capital against some of those positions. We don't think their growth rate is going to be what you can experience from asset managers or banks.

DM: And on the competitive front, how do the insurance companies look, the life companies.

Bob Decker: Well I think what people don't really appreciate is how strong of a competitor the banking system is in the insurance area. They've all had an increase in the amount of focus on that area, and they're formidable competitors with the strength of their balance sheets. And the competitive landscape has never been more
challenging for the incumbent players such as Manulife and Sun Life. We think that will be another stress for them in the year ahead.

DM: But what about Property and Casualty Companies in the insurance side?

Bob Decker: That's an area that we have focused on in insurance, and we believe for example, that our holding in Intact Financial, one of Canada's leading providers of auto insurance; you may know them as Grey Power, its a very well managed company, and they're benefiting from the recovery from earnings coming from the restoration
of pricing power, and as a consolidator, we like that stock's future, it looks very good.

DM: Thanks very much.

Source: ClientInsights.ca / Dynamic Funds