RY looks to be the only bank that was unaffected. GLTA
National Bank Financial analyst Gabriel Dechaine thinks a more dovish shift from the Bank of Canada will benefit the country’s Big 6 Banks.
“Big-6 bank stocks have underperformed the S&P/TSX by approximately 250 basis points so far this year, including an unusual 220bps of second half underperformance,” he said. “The looming recession is what’s keeping bank stocks in check, to state the obvious. And from that perspective, it is important to note that bank stocks currently reflect a 55-per-cent probability of a recession, based on P/B [price-to-book] multiples correcting by 22 per cent from their peaks (i.e., average compression during a recession is 40 per cent, with a range of 20-60 per cent). Moreover, if we assume 2023 PCLs [provisions for credit losses] double (i.e., to 60 basis points, which is more recessionary-like), the pro forma sector P/E multiple of 10.9 times is slightly above the historical 10-year average of 10.6 times.
“Finally, with the Bank of Canada and Fed possibly shifting to a more dovish stance, we could see risk factors weighing on the banks (e.g., housing) moderate. Though we are cautious with regard to CM’s Q4/22 outlook (especially as it relates to NIM), we believe the stock is a solid outperformer candidate over the next 12 months. For the quarter, we are most bullish on RY due to its capacity for NIM outperformance and a potential rebound in the Capital Markets business.”
In a research report released Friday previewing fourth-quarter earnings season for the sector, which is scheduled to begin on Nov. 29, Mr. Dechaine said he expects net interest margin (NIM) divergence within the group to widen and also predicts “another quarter of ‘marginal’ performing provision additions.”
“Margin expansion has been one of the more exciting developments in the banking space, partially offsetting recessionary concerns,” he said. “During Q3/22 Big-6 margins expanded by 7 basis points quarter-over-quarter (all-bank, excl. Trading), with TD (up 12 basis points) and RY (up 13 basis pointss) delivering the most margin expansion. We expect these two banks to report similar outperformance during Q4/22, a reflection of their large core deposit bases. Our expectations are for modest NIM expansion for the other Big-6 banks, with BNS (again) at the low end of the peer group.”
“Q3/22 marked the first quarter of performing provision additions across the Big-6 since Q4/20. The shift resulted from banks taking a more cautious outlook for credit risk, given the higher probability of an upcoming recession. However, the performing ACL ratio actually declined quarter-over-quarter, as loan growth outpaced provision ‘build.’ We expect upward pressure on performing provisions once again this quarter, which should impact the consensus 2023E PCL ratio forecast of 29 basis points, which is slightly below the historical average (i.e., not indicative of a recession).”
Also emphasizing the risk stemming from the volatility in the housing market, Mr. Dechaine reduced his valuation and target multiples for the banks, citing “greater uncertainty” in his earnings outlook, “which could be heavily influenced by PCL volatility.”
“In other words, we are adjusting our valuation multiples to reflect EPS downside risk that could stem from higher loan loss provisions. The exception here is RY, the valuation of which we are maintaining due to its industry-high CET 1 ratio and relatively stronger NIM outlook,” he said.
With that adjustment, he lowered his target prices for the banks’ stocks. His changes were:
- Bank of Montreal ( “sector perform”) to $147 from $151. The average on the Street is $147.57.
- Bank of Nova Scotia ( “sector perform”) to $85 from $90. Average: $81.75.
- Canadian Imperial Bank of Commerce (, “outperform”) to $80 from $84. Average: $73.84.
- Canadian Western Bank ( “outperform”) to $34 from $38. Average: $32.86.
- Laurentian Bank of Canada ( “sector perform”) to $46 from $51. Average: $41.62.
- Toronto-Dominion Bank ( “sector perform”) to $103 from $106. Average: $98.87.
Mr. Dechaine maintained an “outperform” recommendation and $148 target for shares of Royal Bank of Canada . The average is currently $137.58.
Elsewhere, Keefe, Bruyette & Woods’ Mike Rizvanovic also made a series of target reductions to bank stocks. His changes were:
- Bank of Montreal ( “outperform”) to $158 from $159. Average: $147.57.
- Bank of Nova Scotia (BNS-T, “market perform”) to $75 from $86. Average: $81.75.
- Canadian Imperial Bank of Commerce (CM-T, “market perform”) to $69 from $72. Average: $73.84.
- Laurentian Bank of Canada (LB-T, “market perform”) to $38 from $40. Average: $41.62.
- Toronto-Dominion Bank (TD-T, “outperform”) to $102 from $103. Average: $98.87.