BMO Nesbitt Burns Inc. issued calls Thursday on several financial stocks, including ING Canada, and the bank merger issue.

BMO Nesbitt said it initiating coverage on ING Canada Inc. with an “outperform” rating. “ING has consistently demonstrated a successful acquisition track record and underwriting discipline. It has grown at more than twice the industry growth rate over the last 10 years in terms of premiums, and we believe that it can achieve its financial goal of an ROE that is 500 basis points better than the industry given,” it said.

The positive recommendation is based on the firm’s, “industry-leading market share, a successful acquisition track record, a strong capital position and above average industry operating performance.”

At the same time, BMO Nesbitt is raising its recommendation on AGF Management Ltd. to “market perform,” following its earnings announcement and dividend increase Wednesday. It also increased its financial forecasts and price target for the firm.

It notes that, while AGF continues to face net redemptions, below average margins and disappointing results at Unisen, “we believe there has been an important shift in the allocation of free cash flow. We believe the bulk of new free cash flow will be used for dividends and share repurchases.” It notes that it believes the best use of cash flow is buyback sand dividends.

The firm is also increasing its earnings forecasts for GMP Capital Corp., which also announced earnings yesterday. It is increasing earnings per share estimates by 30¢ to $1.70 for fiscal 2006 and by 15¢ to $1.60 for fiscal 2007. As a result, it also hiked its target price for the stock.

Meanwhile, BMO Nesbitt analysts issued a report disputing the conventional wisdom that the ban on bank mergers is unlikely to end in the current environment of a minority Liberal government. “It is a great time to stop the dithering on mergers, to issue a relatively benign policy statement and to allow banks and insurers to face the merger review process,” it says.

“Bank mergers will always be a contentious issue given the consolidated nature of the Canadian banking system and potential for job losses and branch closures. By having the issue surface in a minority parliament, the incumbent government can mitigate the political backlash from any outcome,” it argues. “Specifically, we note that the Liberals could not be solely blamed for any successful, or unsuccessful, outcome from an attempted bank merger.”

The merger process is filled with checks and balances, BMO Nesbitt said. “For a supportive recommendation, it will need the support of at least two political parties. This same logic would apply to bank/insurance mergers. We have always viewed the possibility of a bank/insurance merger as the least risky from a political perspective.”

It added that the biggest political risk accompanying any bank/insurance merger is that insurance agents could see it as a prelude to the sale of insurance via bank branches.

“Other than independent insurance agents, we do not believe that a merger between a bank and an insurer would create the same type of political backlash that has been associated with bank mergers. In fact, during this whole debate on bank mergers, the Canadian life insurance industry has consolidated and is more concentrated than the Canadian banking sector.

“It seems to us that a minority parliament may well be the ideal environment for the Liberals to tackle a fractious issue such as mergers,” BMO Nesbitt said.