Desjardins Securities analyst Doug Young predicts Canadian banks will start fiscal 2023 with “another good quarter,” expecting to see similar trends from the end of last year with “strength in P&C banking offset by weaker wealth and capital markets results.”
In a research report titled Shall we let the good times roll?, he said the focus of the earnings season, which is scheduled to start Feb. 24, will be on net interest margins, loan growth, capital and credit. He’s forecasting a 9-per-cent year-over-year decline in cash earnings per share, “mainly driven by higher performing loan PCLs (vs releases last year) and weaker capital markets results (tough year-over-year comp).”
“More importantly, we expect adjusted PTPP earnings to increase 1 per cent year-over-year on average, fuelled by strong P&C banking results (Canada and U.S.), partially offset by weakness in capital markets and wealth management,” he said. “At the consolidated level, we expect higher net interest income to be partially offset by lower non-interest income and higher non-interest expenses.”
“Expense pressures likely persisted, and we are forecasting a 165 basis points year-over-year increase on average in NIX ratios and negative operating leverage for the group.”
While he remains “overweight” on Canadian bank stocks, Mr. Young predicts “we could perhaps be in for a bumpy ride over the next few months as we veer into a widely expected recession.”
“Turning to the stocks, well, that was an interesting start to the year, with the banks outperforming what has been a robust market move in general,” he added. “This was contrary to our call, as well as historical trends, for a slow start to the year as the market anticipated a recession, with the market starting to look through pending headwinds around mid-year.”
While he did warn of a slowing economic backdrop, Mr. Young raised his target prices for seven of the eight banks in his coverage universe.
In order of preference, they are:
- Toronto-Dominion Bank ( “buy”) to $106 from $105. The average on the Street is $101.63.
- Bank of Montreal ( “buy”) to $146 from $143. Average: $142.70.
- Royal Bank of Canada ( “buy”) to $147 from $145. Average: $141.78.
- Canadian Western Bank (“buy”) to $35 from $30. Average: $30.93.
- National Bank of Canada ( “hold”) to $102 from $99. Average: $103.54.
- Bank of Nova Scotia ( “hold”) to $78 from $76. Average: $78.01.
- Canadian Imperial Bank of Commerce (“hold”) with an unchanged $66 target. Average: $64.44.
- Laurentian Bank of Canada ( “hold”) to $37 from $35. Average: $40.62.