Canadian banks, Manulife mayfeel U. S. auto sector pain

FALLOUT FROM DELPHI

Struggles in the North American auto industry are likely to catch up with Canadian banks and insurers. The biggest exposure lies in the portfolios of Bank of Nova Scotia and Manulife Financial Corp., says Jamie Keating, an analyst at RBC Capital Markets.

The analyst’s search for exposure to the deepening financial crisis in the auto industry was driven by this week’s filing for bankruptcy protection by Delphi, the biggest auto parts supplier in the U.S. Mr. Keating says Bank of Nova Scotia has the highest loan exposure to the sector among Canada’s big banks, with about $4.2-billion. Roughly half that amount is tied to auto dealers.

That is “well over twice the exposure” of Royal Bank of Canada and Toronto-Dominion Bank, the analyst said in a note to clients yesterday.

Mr. Keating says Manulife inherited its “ out- sized” exposure to the auto sector when it acquired U.S. insurer John Hancock last year.

But the analyst expects to see aggressive selling of the balances by Manulife, or hedging against changes in credit or interest rate spreads. Barbara Shecter More risk

ATS Automation Tooling Systems Inc. (ATA/TSX) also has exposure to the Delphi. But MacMurray Whale, an analyst at Sprott Securities, believes the exposure is relatively minor. In fact, Delphi represents between US$6-million and US$8-million of ATS’s annual revenue of $784-million in fiscal 2005 — or just 1.2% at worst.

The bankruptcy could have an upside for ATS as well: “ As Delphi emerges from bankruptcy protection, management will be focused even more on efficiency and productivity, which will require investment in capital equipment that is ATS’s specialty,” Mr. Whale said in a research note yesterday.

The analyst has a “top pick” recommendation on ATS and a target price of $18. The shares closed yesterday on the TSX at $15.39, down 55¢ or 3.5%.