Q2/23 Large Banks Review
TD Investment Conclusion
Q2/23 EPS was down 10% y/y reflecting 3% y/y growth in PTPP and a significant increase in PCLs (up $2.6bn y/y). On average, the banks missed our estimates by 2% with only CIBC and NA beating (consensus) estimates. At 9.6x our 2024E EPS (9.2x consensus), we view group valuation as fair to modestly attractive. Reflecting the relatively low upside to our target prices, moderating PTPP growth, pressure to build capital, and uncertainty regarding the timing and severity of the next credit cycle, we continue to rate the sector MARKET WEIGHT. We downgraded from Overweight on December 20, 2022.
BMO: The slowdown in capital markets activity and less impressive NIM performance are hurting BMO's relative PTPP growth. However, we see at least three reasons to remain bullish: 1) relative valuation appears attractive, in our view, 2) we believe that the BOTW deal will help deliver better EPS growth at a time when several of its peers may lack earnings momentum, and 3) we expect H2/23 capital markets comparisons to reflect more favourably on BMO.
BNS: In our view, Scotia's CET 1 ratio does not support strong organic or acquisitive RWA growth. We also expect BNS' NII and PTPP growth to continue to lag the group for the next two quarters. Margins, capital, and very little clarity on BNS' strategic direction are the key themes driving our HOLD rating. We expect a strategic update from management in the fall.
CIBC: The bank delivered a strong quarter, surprising the street with lower performing loan PCLs, better NIM performance, and better expense management than its peers. Our HOLD rating reflects CIBC's lower capital level and the resulting impact on expected loan growth, and greater exposure to the mortgage market (growth, not credit). Additionally, we believe that CIBC's growth priorities in 2021/2022 could lead to above average credit losses.
NA: The bank's larger capital markets business and fast-growing Cambodian business do not support a premium valuation, in our view. Additionally, we expect NA's PTPP growth to lag most of its peers over the next few quarters. The strong capital ratio partially offsets the anticipated weaker PTPP growth and business mix.
RY: We believe RY's unusually high expense growth reflects management's expectation that stronger NIM would drive revenue growth and support higher expense growth. We believe better expense discipline, the HSBC deal, and a change in deposit trends put the bank in a strong position heading into 2024.
TD: TD delivered the highest PTPP growth supported by strong NII growth and operating leverage. The stock trades at a 2-3% discount to the group (LT average 4% premium) reflecting a lack of clarity on a number of issues including TD's ability to grow in the U.S.