Desjardins Securities analyst Doug Young expects investor sentiment toward Canada’s banks to remain “subdued” in the near term.
In a research report released Tuesday previewing second-quarter earnings season for the sector, which begins with Bank of Nova Scotia and Bank of Montreal on May 24, Mr. Young predicted the crisis south of the border is likely to continue to weigh on sentiment. Canadian bank stocks are down an average almost 6 per cent for the quarter, underperforming the broader TSX.
“It has been an eventful quarter, with history being made, just not the good kind — three of the top five largest U.S. bank failures occurred in the past two months,” he said. “However, this crisis differs from the Great Financial Crisis in that it is liquidity- and duration-driven, not credit-driven, at least not yet. We do not believe the U.S. banking crisis has direct material implications for Canadian banks, and we should get further evidence of this with 2Q FY23 results.”
“Since 1Q FY23, the average P/BVPS [price to book value per share multiple of the Big 6 has decreased by 10 per cent, which can be attributed to the stress in the U.S. banking sector and risk-off sentiment. As we write this preview, a fresh wave of stress has emerged among U.S. regional banks. We believe the fundamentals of Canadian banks remain sound; however, near-term patience may be required.”
Mr. Young is forecasting a 9-per-cent year-over-year decline in cash earnings per share on average, due largely to the normalization in provisions for credit losses. He also expecting a 7-per-cent increase in “adjusted pre-tax, pre-provision (PTPP) earnings, driven by P&C banking operations and partially offset by weaker capital markets results.”
“M&A will be topical,” he said. “With TD’s termination of the FHN acquisition, what’s next? Anything new with TD’s integration of Cowen? How is the integration of Bank of the West (BOTW) going for BMO? Should we read anything into the delayed closing of RY’s acquisition of HSBC Canada?”
“We expect seven of the eight banks to increase dividends (by 3 per cent quarter-over-quarter on average), with TD being the exception in that it typically reviews its dividend annually with 4Q results.”
Mr. Young reaffirmed Toronto-Dominion Bank as his top pick in the sector, maintaining a “buy” rating and $104 target. The average on the Street is $95.61, according to Refinitiv data.
He trimmed his targets for the other seven banks in his coverage universe.