TSX Commentary

Genworth (MIC) – $25.56 – Strong Q4 Results
Outperform, Above Average Risk, Price Target: $34.00
Genworth reported better than expected Q4 results yesterday. EPS came in at $0.67, ahead of the consensus of $0.62. The upside was driven by lower than expected losses related to delinquent mortgages. The overall delinquency rate remained steady at 0.28%, but the average reserves per delinquent loan declined slightly for the first time in at least a couple of years. Ontario’s delinquency rate appears to have peaked in Q2, with Q4 seeing the second consecutive decline, while Alberta and BC’s delinquency rates continue to increase but a slowing pace. Genworth’s MCT ratio (the minimum capital test ratio) increased to 149% in the quarter and is now well above the company’s target of 135% and the regulatory minimum of 120%. Genworth now has approximately $185 million in excess capital. Although the higher MCT ratio provides a greater margin for safety, it also acts as a drag on ROE improvements. RBC CM’s Outperform rating on the stock reflects the view that Genworth offers investors an attractive all-in return over the next 12 months with greater return potential over the medium to longer-term from 1) eventual valuation multiple expansion; 2) incremental future earnings growth from market share gains and 3) positive exposure to long-term growth trends of the Canadian housing and mortgage market. The price target was increased from $31.00 to $34.00.