Canaccord Canaccord Genuity analyst Scott Chan reduced his valuations for Canadian banks on Wednesday in response to to “the challenging U.S. operational environment post the SVB failure.”
“We are lowering our Canadian bank target P/E [price-to-earnings] multiples mainly to reflect the challenging U.S. operational environment and potential impact to EPS (e.g., deposit outflows to higher ST securities, slower loan growth due to tighter lending standards, NIM pressure) post SVB failure (probably lead to higher regulatory standards for small-medium sized US regional banks and M&A consolidation),” he said. “SVB had a niche client base mainly focusing on VC/PE early stage technology and biotech, etc. We believe U.S. Mega bank stocks will likely be beneficiaries coming out of this (i.e., increase deposit market share, IB activities, volatility benefits trading, abide by higher regulatory standards). Our Group target prices (avg.) are revised down 8 per cent with most downside towards TD and BMO.”
In a research report released before the bell, the analyst emphasized National Bank of Canada and Bank of Nova Scotia do not have exposure to U.S. P&C banking. Accordingly, he thinks they are “likely relatively better positioned near term from ongoing uncertainty.”
“Liquidity (i.e., run-off on deposits) has been the primary issue facing recent bank failures (e.g., SVB, Signature Bank, Credit Suisse),” he added. “Due to the oligopoly nature of the Big-6 Canadian banks, we expect Canadian deposits to remain resilient (Q1/F23: Group total deposits up 3 per cent quarter-over-quarter).
“Currently, the Canadian Big-6 Group P/E (NTM) trades at P/E of 9.0 times, representing 13-per-cent discount since Q2/19. Compared to down south, U.S. Mega banks trade at 9.1 times (17-per-cent discount) and large U.S. select Regional banks trade at 6.5 times (50-per-cent discount). Overall, we would look to opportunistically add to Canadian bank stocks on down market days with the Group (avg.) offering a dividend yield of 5.0 per cent. For Q2/F23E, we continue to anticipate slight dividend increases across all banks (except TD) with Group (avg.) growth of 3 per cent.”
Mr. Chan’s target changes are:
- Bank of Montreal ( “buy”) to $130.50 from $151. The average on the Street is $141.99, according to Refinitiv data.
- Bank of Nova Scotia ( “hold”) to $70.50 from $74. Average: $73.38.
- Canadian Imperial Bank of Commerce ( “hold”) to $63 from $66.50. Average: $65.13.
- National Bank of Canada ( “hold”) to $99 from $104.50. Average: $106.75.
- Royal Bank of Canada ( “hold”) to $133 from $137. Average: $142.27.
- Toronto-Dominion Bank ( “buy”) to $86.50 from $104. Average: $100.27.