Bank of Montreal T.BMO

Desjardins Adjusts & Comments on the Space - G&M

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As second-quarter earnings season for Canadian banks approaches, Desjardins Securities analyst Doug Young warns investors to “prepare for a bumpy ride.”

“We are forecasting a 4 per cent year-over-year increase in pre-tax, pre-provision (PTPP) earnings on average for the Big 6 banks,” he said in a research report released Tuesday. “That said, macro developments, not quarterly results, will be a bigger driver of bank stocks over the near term, in our view—specifically inflation, recession concerns, supply chain issues and the Russia–Ukraine conflict.

“Bank stocks have gone from outperforming the market earlier in the year to underperforming now on a year-to-date basis. And the above uncertainties could remain a cloud over the sector near term.”

While he remains “constructive” on the banking sector for the next year, Mr. Young reduced his target prices for the Big 8 stocks by an average of 3 per cent to reflect those increased economic risks.

“The Big 6 Canadian banks are all trading below their 20-year historical average P/4QF EPS multiples and 15 per cent below historical average P/BVPS multiples on average,” he said. “Over the near term, various concerns such as inflation, potential for a recession, supply chain issues and the impact from the Russia–Ukraine conflict could weigh on bank valuation multiples. On the flip side, we believe a lot of these concerns are already baked into valuations— unless a worst-case scenario were to materialize, which is not our base case call right now.”

In order of preference, his targets are:

1. Toronto-Dominion Bank (
   TD-T -0.52%decrease
    
   , “buy”) to $110 from $113. Average: $107.68.
2. Bank of Nova Scotia (
   BNS-T -0.82%decrease
    
   , “buy”) to $96 from $99. Average: $96.26.
3. Bank of Montreal (
   BMO-T -1.72%decrease
    
   , “buy”) to $159 from $163. Average: $165.89.
4. Canadian Western Bank (
   CWB-T -1.36%decrease
    
   , “buy”) to $44 from $45. Average: $43.13.
5. Royal Bank of Canada (
   RY-T -1.44%decrease
    
   , “buy”) remains $150. Average: $149.55.
6. National Bank of Canada (
   NA-T -1.93%decrease
    
   , “hold”) to $104 from $109. Average: $107.91.
7. Canadian Imperial Bank of Commerce (
   CM-T -0.36%decrease
    
   , “hold”) to $163 from $169. Average: $173.49.
8. Laurentian Bank of Canada (
   LB-T -0.94%decrease
    
   , “hold”) to $47 from $49. Average: $47.18.

“For those worried about the downside, RY has historically held in the best in times of stress,” said Mr. Young.