Analyst upgrade... Canaccord Genuity analyst Scott Chan sees tailwinds emerging for Canadian banks from their personal and commercial operations as net interest margins benefit from a “positive change” in future rate hike expectations.
In a research report released Monday, he raised his financial expectations and target prices for shares of the Big 6, also seeing encouraging loan growth trends.
“For 2022, the futures market is now pricing in less-than 5/more than 5 interest rate hikes in the U.S./Canada, respectively,” he said. “Based on Canadian banks interest rate sensitivity disclosures (assuming 100 basis points increase in interest rates), we analyze each Bank’s incremental NII and EPS accretion potential (largely falls to the bottom line). In that scenario, we suggest that TD would benefit the most with EPS accretion at 9.9 per cent (CM second) and BNS the lowest at 1.6 per cent. Among the other Banks, we suggest that CM (4.9 per cent) and RY (4.7 per cent) have above-average EPS accretion potential, while BMO (3.5 per cent) and NA (2.7 per cent) are below average. That said, we note that BMO’s US P&C exposure (US proforma PTPP at 44 per cent of total) should significantly benefit from their recent Bank of the West acquisition.
“We believe bank sensitivities give us a good sense of direction on potential positive implications toward NII and EPS accretion. In our models, we have incorporated 50 bps of incremental rate increases in U.S./CA, which could still prove conservative (other items to consider such as product mix, market competitiveness, yield curve has flattened recently, forward yield curve as well) based on our prior assumptions (and current futures interest rates market pricing). Overall, we now forecast Group F2022E / F2023E NII growth of 6 per cent/10 per cent, representing 1 per cent/2 per cent positive NII revisions.”
“Going forward, we favour the Banks (BMO, BNS, CM, TD) with larger P&C exposure/ rate sensitivity (largely lagged most other segments during the pandemic) and generally less constructive on Banks (RY, NA) with more market-sensitive segments (e.g. Capital markets, Asset management, Wealth management). In the near term, we see tough comps and headwinds on market-sensitive businesses (e.g. asset declines, trading normalization) impacting relative valuation.”
Mr. Chan rates Bank of Montreal as a “buy” raised his target to $167 from $160. Average: $159.11.