Scotia Capital After many quarters of “bearishness,” Scotia Capital analyst Meny Grauman is getting “much more constructive” on the outlook for Canadian banks.
However, he cautioned more patience is likely necessary, emphasizing “from a numbers point of view we only see that happening in F2025.”
“For F2024 we still see downward pressure on estimates from several factors including very sluggish revenue growth, particularly in the U.S., and the hit to revenue from the elimination of the tax deductibility on dividend income from Canadian businesses,” said Mr. Grauman. Those factors, along with a further normalization in PCL ratios take our EPS estimate for F2024 down by 3 per cent on average for the group, a number which is also being weighed down by the later-than-expected closing of RY’s HSBC Canada deal. That said, with the North American economy showing signs of resilience, and capital rules not biting as hard as we feared, we see reason to be hopeful for F2025, and to believe that F2024 may mark a low point for bank earnings and stock performance. We are not yet willing to shift from our preference of lifecos over banks, especially given the move we saw in bank stocks this past December, but do believe investors should begin to take a less defensive view of the sector.”
In a research report released Tuesday previewing first-quarter earnings season in the sector titled Time to Cage the Bear?, Mr. Grauman said he expects the sector to generate core cash earnings per share of $2.11 a drop of 6 per cent quarter-over-quarter and 11 per cent year-over-year.
“On a PTPP basis earnings are projected to be down 2 per cent year-over-year reflecting sluggish loan growth and flat margins,” he added. “We don’t expect any dividend increases this quarter except at EQB. Heading into Q1 reporting season we like the set for CIBC and NA, along with CWB.”
Mr. Grauman’s other targets are:
- EQB Inc. ,( “sector outperform”) to $111 from $99. Average: $103.89.
“Our price targets continue to be based on our F2025 EPS estimates, and head higher as we model in a more favorable outlook for that out year, especially when it comes to PCLs, and also a higher target multiple and lower excess capital threshold,” said Mr. Grauman. “Previously we were valuing the shares based on an average P/E multiple of 9.5 times but take that up to 10.0 times (implies 10.6 times F2024 EPS). We remain below the historic forward average P/E multiple of 11.0 times as we continue to acknowledge lingering uncertainty about the path of rates and the fact that we believe growth for the banks will remain somewhat constrained even next year. BMO is still at the top of our pecking order, followed by RY, and we believe that both firms have growth advantages over the coming years thanks to M&A driven expense synergies, respectively. To that SO list we add CM, while we leave NA and TD as our Sector Performs among the large Canadian banks. Among the smaller banks, we continue to favour EQB which we rate SO. But we also upgrade CWB to SO from SP in the wake of its recent selloff. LB continues as a Sector Perform as we wait to see Management’s refreshed strategic plan.”