In a research report wrapping up first-quarter earnings season for Canadian banks, BMO Nesbitt Burns analyst Sohrab Movahedi thinks further patience may be necessary for investors.
“1/23 saw five out of “Big 6″ topping consensus estimates — most at CM; BNS was the solo miss. Industry cash operating earnings of $15.5-billion (down approximately 2 per cent year-over-year) were reflective of higher credit costs and double-digit expense growth,” he said. “Investor focus will likely remain on net interest margins, credit costs, and capital levels for the foreseeable future. In our view, there was nothing in the quarter that would get investors sitting on the sidelines more constructive on the banks.”
Mr. Movahedi made a trio of target price adjustments:
- Bank of Nova Scotia (“market perform”) to $75 from $85. The average on the Street is $73.98.
- Canadian Imperial Bank of Commerce ( “outperform”) to $69 from $70. Average: $65.02.
- Toronto-Dominion Bank ( “market perform”) to $98 from $93. Average: $101.62.
He maintained his targets for these stocks:
- National Bank of Canada (“outperform”) at $103. Average: $107.21.
- Royal Bank of Canada ( “market perform”) at $132. Average: $142.52.
“The bank index currently trades at 9.7 times our 2024 earnings estimates (target prices based on 10.1 times 2024 EPS target for the bank index), which is at the lower end of the historical 10-12 times forward P/E range, but reflects earnings growth uncertainty,” he said. “For patient investors, we see the banks’ conservative credit provisions, margin tailwinds, and strong capital levels positioning them well to navigate the uncertain economic environment; current valuations and attractive dividend yields should provide downside protection.
“Following Q1/23 results, we made no rating changes (we still rate CM and NA Outperform), but lowered our target prices on BNS, TD, and CM. On CM, our lower target price was primarily due to a marginal reduction in our 2024E, whereas our TD and BNS changes were premised on both lower 2024E and lower valuation multiple targets. We justify the lower multiples at both TD and BNS in large part because we view their earnings potential as drifting targets for the foreseeable future.”