In his quarterly earnings preview titled As We Head Into Winter, Is It Really Spring for Canadian Bank Stocks?, Scotia Capital analyst Meny Grauman said his base case is no longer a “a soft landing scenario but a ‘higher for longer’ rate environment that will increasingly strain consumer finances.”
“Given the underperformance of Canadian banks so far this year, it is only natural to look for value in a sector that has historically always rewarded value buyers,” he said. “For our part, we do see upside to shares in a Goldilocks scenario where rates fall slowly but materially in response to easing of inflation pressures rather than a deep recession. This past week, that best-case scenario looked more likely as October U.S. CPI came in well below expectations and a host of economic indicators showed signs of a gradually slowing economy. But while it may look like springtime for bank stocks, we remain skeptical on that ideal outcome given the persistence of inflation over time. Despite a good week for the shares, we are not yet ready to declare victory on this front, especially in Canada where wage growth remains elevated and strong immigration flows and a tight housing market make a soft landing particularly tricky.”
Mr. Grauman is forecasting core cash earnings per share for the sector of $2.07 for the fourth quarter, which is a drop of 3 per cent sequentially and 7 per cent from the same period a year ago. He attributed the decline to a normalization in loan loss provisions.
“We are sticking to our sector call favouring lifecos over banks, despite the fact that lifeco outperformance looks stretched by historical measures and bank stocks begin to reverse recent losses,” he said. “As we saw during this past lifeco earnings season, the outlook for lifeco EPS growth continues to be well within their medium-term target ranges, boosted by higher long rates and strong excess capital generation driving buybacks and M&A optionality. Contrast that with our bank forecasts which call for an extended period of core EPS growth (and core ROEs) below the banks’ medium-term targets (and historical averages for that matter as well).
“Heading into the quarter we forecast some upward pressure on expenses from severance charges and typical elevated year-end spending. In normal times this should set the stocks up well for F2024, but we remain skeptical on the ability of banks to deliver material positive operating leverage next year and into F2025 given the slowing revenue environment and ongoing pressure on expenses from inflation and ongoing tech and regulatory spending needs.”
Mr. Grauman lowered his recommendation for National Bank of Canada , citing continuing headwinds emerging from Cambodia-based ABA Bank and “a broader deceleration in overall earnings growth at what remains the bank with the leading ROE [return on equity] of the group.”
His target for National Bank shares to $97 from $105. The average on the Street is $101.22.
The analyst’s other target adjustments are:
- Bank of Montreal ( “sector outperform”) to $135 from $143. The average on the Street is $127.57.
- Canadian Imperial Bank of Commerce ( “sector perform”) to $57 from $62. Average: $60.45.
- Canadian Western Bank ( “sector perform”) at $31 from $32. Average: $32.64.
- EQB Inc. ( “sector outperform”) to $99 from $100. Average: $95.75.
- Laurentian Bank of Canada ( “sector perform”) to $29 from $38. Average: $33.55.
- Royal Bank of Canada ( “outperform”) to $135 from $136. Average: $134.35.
Mr. Grauman maintained his $101 target for shares of Toronto-Dominion Bank (“sector perform”). Average: $91.85.
“Heading into reporting we like the setup for BMO where we expect upside to synergy targets from Bank of the West,” he said. “We also like the setup for CM (looking past some likely severance charges), as well as for EQB and CWB among the smaller banks. Contrast that with a more cautious outlook for TD given the risk of a large charge tied to AML issue in the U.S. (we estimate something in the range of $1-billion), and NA where challenges at ABA remain front and centre, and an improvement in Financial Markets results may be underwhelming even after very weak Q.”