Big Banks Q1/22 Outlook TD Investment Conclusion
The Big Banks report Q1/22 results from February 24 to March 1. We expect Q1/22E EPS to be up 8% y/y (up 4% q/q). Strong forecasted EPS growth reflects a forecasted 69% y/y decline in PCLs driven by a release of performing loan reserves of $0.8bn, versus a reserve release of $230mm last year. Impaired loan losses are also expected to remain low relative to historical levels. This quarter, we expect the focus to be PTPP growth, particularly through NIM expansion, capital allocation, including acquisitions, buybacks, and organic growth in RWA.
We expect Q1/22E PTPP earnings to be up 1% y/y reflecting good momentum in NII and fee income, offset by a 26% y/y decline in trading revenue. We expect BMO to deliver industry-lending PTPP and BNS to lag. Forecasted NII growth of ~5% y/y reflects NIM expansion of 3bps q/q (flat y/y) and loan growth (8%-9%). Fee growth of 6% y/y reflects more robust card spending, higher deposit fees, and continued strength in wealth management revenue. Offsetting the solid revenue picture, we forecast non-interest expenses (excluding variable comp) to be up a relatively high 6.5% reflecting wage inflation, targeted hiring in the technology sector, and higher travel, advertising, and professional fees.
We expect PTPP growth to accelerate materially throughout 2022 as higher interest rates and a shift to loans from low-margin liquid securities pushes the all- bank industry NIM up ~13bps from Q4/21 to Q4/22E. Looking at the long-term relationship between industry NIM and five-year rates, the 13bps forecasted increase in NIM is consistent with the average of the Canadian and U.S. 5-year bond yields rising 100bps from Q4/21 levels (~95bps to ~195bps) by the end of 2022E. In this respect, we are explicitly building in four 25bps central bank rate increases in Canada and the U.S. in our estimates.
A review of the key valuation and performance metrics supports taking a more cautious view on the group. The Big Bank stocks have approximately doubled since we upgraded the sector to OVERWEIGHT in March 2020 and have materially outperformed every financial services sectors in Canada and the U.S. as well as the S&P/TSX and S&P500 over the last 12 months. The Big Banks P/E (2023E) is also approaching 12.0x, a level we very rarely see the group exceed more than just briefly. We believe consensus estimates can move higher, but we do not expect the move to be significant; almost certainly not as meaningful as what we saw in 2021. However, we believe the "hedge value" against rising interest rates that the group offers could cause valuations to overshoot in the near term. We continue to rate the group OVERWEIGHT, but we continue to favour MFC, IAG, and IFC over the banks.