Set Up for the Banks Desjardins Securities analyst Doug Young likes the setup for Canadian banks heading into fiscal 2022.
In a research report released Tuesday previewing the fourth-quarter earnings season, which begins on Nov. 30 with Bank of Nova Scotia, he raised his financial expectations for the sector, forecasting pre-tax, pre-provision (PTPP) earnings growth of 10 per cent year-over-year on average, driven largely by performances from Canadian P&C banking and wealth management divisions.
Following last week’s announcement from Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, that lifted pandemic-related restrictions that prevented banks and insurers from raising dividends and buying back shares, Mr. Young is also expecting “a round of healthy dividend increases, the setup of NCIBs and stock buybacks of approximately 2 per cent of shares outstanding” during 2022.
“The Big 6 Canadian banks on average are trading just above their 20-year historical average P/4QFEPS multiples, but below their historical average P/BVPS multiples,” he said. “The stocks underperformed in FY20 on the back of the unprecedented economic situation caused by COVID-19; however, they recovered nicely in FY21 from better-than-anticipated credit results and an improved economic outlook. With the accelerated economic reopening well underway, we believe the setup is good for the banks over the next year. That said, there are some near-term headwinds such as normalizing capital markets activity and the potential for a cooling housing market. In addition, it’ll be a tough year-over-year comp for cash EPS in FY22, as FY21 included significant performing loan ACL releases. And COVID-19 risks have clearly not disappeared.”
Mr. Young upgraded his rating for Bank of Montreal (
) to “buy” from “hold,” citing four reasons: “(1) A more positive outlook for commercial loan growth in Canada through FY22; (2) a noteworthy amount of excess capital; (3) room for a healthy dividend increase; and (4) management’s commitment to managing the NIX ratio lower.”
With his increased financial estimates, he also raised his target prices for the eight banks in his coverage universe with Toronto-Dominion Bank (
) remaining his “top pick.”
In order of preference, his changes are:
- Toronto-Dominion Bank (
, “buy”) to $100 from $97. The average on the Street is $93.73. - Bank of Nova Scotia (
, “buy”) to $90 from $89. Average: $87.67. - Canadian Western Bank (
, “buy”) to $45 from $44. Average: $42.08. - Royal Bank of Canada (
, “buy”) to $143 from $141. Average: $144.13. - Bank of Montreal (
, “buy”) to $146 from $138. Average: $144.87. - National Bank of Canada (
, “buy”) to $108 from $103. Average: $104.50. - Canadian Imperial Bank of Commerce (
, “hold”) to $157 from $154. Average: $161.47. - Laurentian Bank of Canada (
, “hold”) remains $48. Average: $46.36.