cibc analyst: price target down again to $32Sidelined Until New Strategy Announced
Our Conclusion LB is trading at deeply discounted multiples with a P/BV of 0.4x and P/E (2024E) of 6.0x. We see significant upside if management can execute on a profit improvement plan that takes adjusted ROE from 7% (CIBCe F2024) to closer to 10%. However, given the challenging economic environment and bank-specific challenges, we find it hard to argue that buying the stock today is compelling. After all, this will be the third attempt at a new strategic plan under a new CEO – will the third time be the charm? We reduce our price target from $35 to $32 on lower estimates, and maintain our Neutral rating.
Key Points
EPS Revisions. We have reduced our F2024 and F2025 EPS estimates each by roughly 8%, primarily driven by lower NII. Our 2024E NIM estimate decreases by 7bps and loan growth decreases to 2% based on management guidance for flat NIM and slow loan growth for F2024.
Waiting for a full strategic update. What we learned is that LB will more aggressively pursue cost efficiencies and aims to be a more customer-centric bank. What exactly that means and how it is achieved will have to wait for the spring update. Management has a profit improvement mandate and thus we do not expect another strategic review. We think it is unlikely that the stock will materially re-rate between now and that strategic update.
Capital is in a good position. CET1 closed the quarter at 9.9%, up from 9.1% a year ago, and with minimal loan growth should be building at roughly 5-10bps per quarter. We think the best use of capital would be share repurchases, given the stock is trading at <0.5x P/BV with an expected adjusted ROE of ~7%. That implies a return of >14% on share repurchases, which we think would be hard to match with organic growth.
Credit performance looks fine. The FQ4 PCL ratio of 18bps is well below the Big 6 average of 38bps. F2024 guidance of high teens to low twenties suggests it is expected to remain below the Big 6 average. The ACL ratio of 58bps is up modestly from 54bps a year ago, and probably has some room to move higher. We forecast a F2024 PCL ratio of 21bps.
More aggressive actions on expense efficiencies. LB incurred $12.5MM of restructuring charges in FQ4 and expects another $6.5MM next quarter. Headcount reductions will result in lower expenses, but it is harder to say whether this will correspond to better financial outcomes over time. We forecast flat expense growth in F2024, vs 3.5% in F2023, and positive operating leverage of 1.4%.
Muted revenue growth expected. Management expects muted loan growth in F2024 due to economic conditions, which is consistent with our view. We expect modest growth in non-interest revenue given the economic outlook and weak results in FQ4. We forecast revenue growth of only 1.3% in F2024.