BofA on Canadian banks BofA analyst Ebrahim Poonawala entitled a research report on Canadian banks Dicey Proposition. Obviously, this is a short-term tactical view about relative performance, however, rather than a crisis, his focus was on headwinds caused by an expected negative economic backdrop instead of anything the banks themselves are doing,
“Our meetings with bank management teams and industry experts during BofA’s annual Canada Banks Day painted a picture of a worsening macro-economic backdrop. BofA’s Economics team forecasts GDP growth decelerating to 0.8 per cent in 2024 (1.1 per cent 2023) with risks skewed to the downside. In terms of fundamentals, an economy that is flirting with recession is likely to serve as a headwind to EPS growth and ROEs for banks while markets discount tail risk events stemming from higher for longer interest rates… A recurring theme during the day was expectations for increasing stress on unsecured lending and commercial, as borrowers begin to feel the impact from higher rates. Stagflation is the worst case scenario (= downside risks to our forecast), while our base case assumes that banks will muddle through what is likely to be an uncomfortable adjustment for the consumer to structurally higher interest rates … We forecast relatively anemic EPS growth 2.3 per cent year-over-year for FY24 with potential for higher credit costs (PCLs) likely the biggest wildcard … Stock valuations at 9.2 times 2024 estimated P/E vs 11.5 times pre-pandemic 5yr median and 1.3 times P/YE23 estimated Book value vs. 13.6 per cent 2024 estimated ROE forecast reflect EPS headwinds, macro uncertainties. TD Bank is our top pick and only Buy-rated stock in the group”
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