Ahead of the start of fourth-quarter earnings season for the sector next week, Credit Suisse’s Joo Ho Kim sees Canadian banks remaining “well-positioned to weather through a downturn given the resilient earnings generation and balance sheet strengths.”
The equity analyst also thinks “strong upside exists” for the sector despite several approaching headwinds.
“Although Q4 tends to be a guidance-heavy quarter for the Canadian banks, it remains uncertain whether a further positive forward outlook (whether for NIMs, credit, or others) would be enough to send the sector valuation higher, especially in the absence of further macro clarity,” he said in a research report released Tuesday. “Even as we forecast a more challenging growth environment in F2024, our estimates suggest a still very respectable mid-teens ROE for that year.”
For the quarter, Mr. Kim expects core earnings per share for the Big 6 to be essentially flat-over-year on average, which is in line with the consensus view on the Street. On a pre-tax, pre-provision (PTPP) basis, he sees earnings growth of 5 per cent quarter-over-quarter and 12 per cent year-over-year.
“For the quarter, we assume dividend increases across all the banks in our coverage universe,” he said.
While maintaining his recommendations for the stocks in his coverage universe, Mr. Kim did adjust his pecking order heading into earnings season.
“While CM has been our top pick in the sector since we launched back in May, we now move the shares down to the bottom of our Outperform pecking order,” he said. “That is driven by our view of negative housing market dynamics (from growth and the sentiment from a credit perspective) that could disproportionately impact CM’s valuation, as well as lower short-term relative upside on margins. Our pecking order accordingly moves to BMO, NA, RY, and CM among our Outperform names.”
Mr. Kim raised his targets for these stocks:
- Bank of Montreal ( “outperform”) to $152 from $150. The average on the Street is $147.39.
- National Bank of Canada ( “outperform”) to $111 from $106. Average: $102.13.
- Royal Bank of Canada ( “outperform”) to $150 from $143. Average: $137.61.
- Toronto-Dominion Bank ( “neutral”) to $96 from $95. Average: $98.91.
“We take this opportunity to introduce our new F2024 estimates, reflecting a more challenging growth environment,” he added. “Our F2024 core EPS estimate implies an average year-over-year growth of just 1 per cent, reflecting a further slowdown in loan growth, flattish NIMs, good expense management, and rising PCLs. Our core ROE estimate for the sector ticks down to a still respectable 14.6 per cent across the Big Six banks.”
“We make very modest changes to our F2023E and on average, our core EPS estimate for that year goes up by 1 per cent. We now base our target price calculation off the new F2024 estimates, and our recommendations for the banks remain unchanged.”
Elsewhere, another analyst also made target adjustments on Tuesday.
After cutting his cash earnings per share projections by an average of 3 per cent, Canaccord Genuity’s Scott Chan made these target revisions:
- Bank of Montreal (BMO-T, “buy”) to $148 from $150.50. Average: $147.39.
- Bank of Nova Scotia ( “buy”) to $83.50 from $86.50 Average: $81.53.
- Canadian Imperial Bank of Commerce ( “buy”) to $75 from $79. Average: $73.59.
- National Bank of Canada ( “hold”) to $101.50 from $100. Average: $102.13.
- Royal Bank of Canada ( “hold”) to $131 from $130.50. Average: $137.61.
- Toronto-Dominion Bank ( “hold”) to $95 from $94.50. Average: $98.91.
“Since FQ3 reporting, Group performance has varied with BNS (exposure to International such as Pacific Alliance regions) and CM (largest Cdn. mortgage book) as the clear laggards,” said Mr. Chan. “Both Banks Q3/F22 NIM were underwhelming particularly compared to peers. We believe the same theme could play out this quarter with our CM (down 1 per cent) and BNS (1 per cent) F2023E EPS growth rate below the Big-6 banks (avg.) of 4 per cent. As a result, we are lowering our relative P/E target discount on BNS to 6 per cent (from 3 per cent) and on CM to 2 per cent (from 0 per cent). We suggest more strategic uncertainty at BNS near term from their new incoming CEO (see link). Overall, we are lowering our Group (avg.) target prices by 1 per cent (most at CM and BNS; slightly positive with NA and TD). Heading into FYE results, we can envision a ‘kitchen sink’ quarter potentially highlighted by higher-than-expected costs and performing reserve builds.”