RBC Dominion Securities analyst Darko Mihelic lowered his 2024 core earnings per share expectations for large Canadian banks by an average of 2 per cent on Monday after updating his net interest margin forecast.
“At the all-bank level, NIM expansion has been ’best’ at TD, whereas BNS has had NIM declines since interest rates started rising,” he said in a research note. “Looking at recent NIM performance and NIM sensitivity, we note that there were larger differences in the disclosed vs. implied NIMs for BNS and CM than for the other banks in our coverage. “We lower our NIM estimates for BNS but still expect BNS to have the strongest NIM growth in 2024, as it is the only large Canadian bank positioned to benefit from falling rates (RBC Economics forecasts a drop in interest rates next year). Unfortunately, the positive position to lower rates for BNS is much smaller now than historically. ... Although our estimates show a rebound in core EPS growth in 2024, there is still significant uncertainty in the macro environment and on the regulatory front, leaving us with lower than usual conviction on the group.”
Overall, Mr. Mihelic sees valuations across the sector as “fair” and several “challenges,” particularly inflation and interest rates, prevent him from taking a more bullish stance, believing “a higher-for-longer interest rate scenario will at a minimum crimp economic activity and at worst cause a hard economic landing.”
“It seems that 2023 will end with negative EPS growth, lower ROEs, and plenty of trepidation heading into 2024,” he said. “Our forecasts for 2024 show a healthy return to EPS growth and modestly improved ROE but with many caveats. The risks to our forecasts are higher than usual, in our view, given the high levels of interest rates, inflation, and general indebtedness in Canada. We view capitalization as ‘fine’ for the banks, with just one bank in our universe (TD) having significant excess capital. All of the other banks in our universe should be considered adequately capitalized considering that they are currently using a DRIP with stock issuance from treasury, though NA might be close to being considered well-capitalized (NA does not have a discounted DRIP).”
With that view, Mr. Mihelic reduced his targets for Canadian bank stocks on Monday. His changes are:
- Bank of Montreal (“outperform”) to $134 from $138. The average on the Street is $129.78.
- Bank of Nova Scotia (, “sector perform”) to $68 from $72. Average: $68.56.
- Canadian Imperial Bank of Commerce (“sector perform”) to $66 from $67. Average: $61.35.
- National Bank of Canada ( “sector perform”) to $105 from $108. Average: $102.80.
- Toronto-Dominion Bank ( “outperform”) to $92 from $94. Average: $91.55.
“We lower our 2024 core EPS estimates for the large Canadian banks under our coverage by approximately 2 per cent on average,” he said. “Our 2024 core EPS estimate decreases the most for BNS by 6.7 per cent while our 2024 core EPS estimate for CM improves by 1.1 per cent. We model core EPS for the group to increase an average of 8 per cent on average in 2024, then grow 5 per cent on average in 2025.”