Credit Suisse Credit Suisse analyst Joo Ho Kim was not impressed by the fourth-quarter results from Canadian banks, but he took a more positive view of their outlooks.
“We entered the Canadian banks’ Q4 earning season with a sense of optimism that the banks will finish off a strong year with a solid quarter,” he said. “The actual results underwhelmed our more positive stance, with both the headline and underlying (PTPP) earnings missing our forecast on average (with divergence in results as expected). The good news is that the banks’ guidance for the year ahead was generally constructive in our view, and credit conditions did not show signs of significant deterioration. Looking ahead, we acknowledge that the uncertainties in the macro picture remain the key overhang on the sector’s valuation. Given such, we continue to believe that investors will pay for quality (and ‘defensive’) to a greater degree (as evidenced by the valuation dispersion among the group), in what could potentially be a year of ‘normalization’.”
“”On a sector-wide basis, we saw the banks continue to benefit from NIM expansion (albeit at a more moderate pace), and loan growth was much more robust than expected. Capital Markets revenue was also modestly better than what we expected. That was offset by a miss on expenses and PCLs (although we don’t see any signs of credit concerns yet). Putting them all together, PTPP earnings growth of 8 per cent year-over-year was solid but below both us and consensus.”
In a research report released Friday, Mr. Kim lowered his recommendation for shares of Canadian Imperial Bank of Commerce to “neutral” from “outperform” in response to recent price depreciation.
“While the share price has declined meaningfully (down 10 per cent) since the bank’s weak Q4 results, we do not see a near-term catalyst that could help boost it on a relative basis,” he said. “Partly reflecting CM’s weaker guidance, we now believe the bank could continue to underperform on NIMs relative to peers, an area which should remain a near-term focus for the sector in our view. We also highlight CM’s overweight exposure to the domestic housing market as another factor that could suppress the shares’ relative upside, given the weak growth dynamic and the negative sentiment from a credit perspective (despite our belief to the contrary on a more fundamental basis).”
His target for CIBC shares slid to $63 from $66. The average on the Street is $66.09.
He maintained his recommendations and target prices for the rest of Big 6 banks. They are:
- Bank of Montreal with an “outperform” rating and $152 target. Average: $145.81.
- Bank of Nova Scotia with a “neutral” rating and $73 target. Average: $79.08.
- National Bank of Canada with an “outperform” rating and $109 target. Average: $102.71.
- Royal Bank of Canada with an “outperform” rating and $153 target. Average: $140.34.
- Toronto-Dominion Bank with a “neutral” rating and $98 target. Average: $101.63.
“Our pecking order for the Outperform-rated stocks is BMO, NA, and RY, with our target prices for these banks implying a very strong total return of 23 per cent,” he said.