Scotiabank Scotiabank bank analyst Meny Grauman published some interesting observations about his sector along with his top picks,
“Third quarter bank reporting season was peculiar in one respect: the market’s absolute fixation with [profit] margin expansion to the exclusion of almost everything else. On the face of it, the obsession with margins this quarter may be hard to understand, but if we take a step back and consider the broader macro context in which we now find ourselves, it begins to make a lot more sense. The reality is that while bank results themselves continue to show no real signs of recession, investors remain (rightly) uncertain about just how big an impact rapidly rising rates will have of underlying economic growth in the quarters ahead. In that context investors see market-related revenues already under pressure, loan growth likely to slow materially even if it hasn’t really done so just yet, and PCLs [ loan loss provisions] heading higher even if it is yet unclear if they will spike. In that context, the only real earnings driver that is poised to continue to push numbers higher is expanding margins as central banks continue to hike rates. In this uncertain economic environment, the market has put a spotlight on margins precisely because it is the one thing that seems to matter most right now… RY remains our top pick both for its upside to rising rates on both sides of the border, but also for its defensive attributes … We also continue to like BMO for its good margin upside (especially in the US) and the expected boost to EPS growth coming in 2023 from the Bank of the West deal”