LOWER RATES IN H2/24 THE POTENTIAL CATALYST
THE TD COWEN INSIGHT
Muted F2024 EPS growth appears reasonable, in our view, given our forecast for flat NIMs, lower loan growth, and higher PCLs. We are below F2024 EPS guidance (but above consensus). We forecast earnings growth to pick up in F2025. Valuation is in-line (P/B) or below (P/E) EQB's L5Y averages, suggesting near-term headwinds are priced in, but upside potential as we move into late-2024/2025.
Event: FQ2/24 preview: Results after market close on May 29; conference call at 10 am ET on May 30 here.
Impact: SLIGHTLY NEGATIVE
Our revised target price of $98 (down from $105) reflects a 1.1x-1.2x multiple on 4QF P/ B (down from 1.2x-1.3x previously, but in line with EQB's L5Y average). The lower multiple reflects our muted F2024 earnings growth expectations (lower than guidance, but above consensus), but constructive ROE outlook (15%+) and expectation for better earnings growth in F2025. Our target price implies 7.7x 2025E EPS. This is higher than EQB's 7.1x L5Y average, but below the historical P/E averages for the Canadian regional banks (~8.5x) and Big-6 (10.1x).
We have reduced our FQ2/24 EPS forecast to $2.65 (from $2.74 previously) due to slightly higher PCLs. Our F2024 EPS forecast of $11.62 is now below the low end of guidance ($11.75-$12.25). Consensus is $11.53. We are in line with guidance for most other metrics (loan growth, PTPP, ROE, and CET 1). We are forecasting more constructive earnings growth in F2025 (potentially lower interest rates supporting loan growth and lower PCLs).
We will be looking for an update on arrears trends and PCL expectations. Last quarter, management reiterated it expects H2/F24 to be stronger than H1/F24. We are forecasting PCLs to peak in FQ2/24 (equipment financing and commercial), and gradually improve thereafter.
Figures 4-11 provide an update on housing and credit trends. Housing sales are up 11% ytd (albeit vs. a soft early-2023 comparable), in line with TD Economics 2024 forecast (+10%). Home prices are -3% y/y (softness in ON and BC could persist, while AB looks healthy). Mortgage rates remain elevated, but have come off from peak 2023 levels. Unemployment is gradually moving higher (consensus suggests a peak in late-2024), and credit trends continue to migrate higher (insolvencies and consumer delinquencies).
EQB valuation at 1.1x P/B and 6.7x P/E (4QF) is in-line (P/B) or below (P/E) L5Y averages. Near-term uncertainty appears to be priced in (consensus is below guidance). We see valuation upside potential as we move into late-2024/2025 (potentially lower rates, better loan growth, and improving credit conditions).