In a research report titled The Best Offense Is a Strong Defense, and That Makes TD Our Best Idea, Scotia Capital analyst Menny Grauman thinks the earning season “will make it very clear that the US regional bank crisis did not cross the border, recent events in the United States serve as a good reminder that investors need to focus on liquidity risk and not just credit risk when thinking about banks.
“That is not to say that worries about credit will subside, just the opposite as the market continues to take a keener interest in banks’ CRE exposure in particular,” he said. “Nevertheless, in addition to all the credit metrics investors typically look at, this earnings season liquidity metrics and deposit trends will get a lot more air time, especially for the smaller banks we cover.
“Broadly speaking, the failures of SIVB, Signature Bank and FRC should actually be viewed as further vindication of the Canadian banking model, which is dominated by a few large and diversified players. But while the U.S. banking sector probably needs to become more ‘Canadian, that does not mean that there are no negative implications for our banks. Those negatives include regulatory uncertainty in the US, and the likelihood of even tougher regulation at home.”
For the quarter, Mr. Grauman is forecasting the sector to generate core cash earnings per share of $2.25, down 7 per cent from the first quarter and 5 per cent versus fiscal 2022.
“Note that the year-over-year result is being weighed down by a normalization in loan loss provisions and for a number of banks very tough Q2/F22 comparables,” he said. “On a PTPP basis, earnings are projected to be up 11 per cent yesar-over-year on still solid NII growth. On average, our quarterly EPS estimates are below consensus, but we are above on NA and TD and modestly below on BMO, CM, CWB, LB, and RY.
“In terms of positioning into the quarter, we prefer TD and NA. Among the smaller banks we prefer CWB over LB for the quarter.”
He maintained his targets for the stocks in his coverage universe. They are:
- Bank of Montreal ( “sector outperform”) at $151. Average: $139.38.
- Canadian Imperial Bank of Commerce ( “sector perform”) at $66. Average: $64.22.
- Canadian Western Bank ( “sector perform”) at $28. Average: $30.71.
- EQB Inc. (EQB-T, “sector outperform”) at $82. Average: $86.88.
- Laurentian Bank of Canada (“sector perform”) at $38. Average: $39.85.
- National Bank of Canada ( “sector outperform”) at $111. Average: $105.29.
- Royal Bank of Canada ( “sector outperform”) at $146. Average: $140.17.
- Toronto-Dominion Bank (“sector outperform”) at $104. Average: $95.77
“Although RY and NA have been the ‘go to’ defensive names in the space for some time now, we want to suggest that TD should in fact take that crown now that it has walked away from the FHN acquisition,” he said. “With a peer leading pro forma CET1 ratio of 15.0 per cent, TD now has an underappreciated fortress balance sheet that is high enough to withstand a very significant amount of economic stress. Yes, the bank needs to answer some important strategic questions; however, given regional banking crisis in the US and the overall downbeat macro-economic outlook defense looks pretty good now. This is why, despite their rich relative valuation premiums, we also continue to rate NA and RY Sector Outperform. Notwithstanding the uncertainty about the U.S. regulatory environment, we also continue to like BMO here as significant synergies from the BoW deal should help offset a broader slowdown in organic revenue growth.”