Big Six Banks Q4/22 Outlook
Squarely Focused on Deposits, NIM, Mortgage Market Downgrading CIBC to HOLD from Buy - Margins & Mortgage Renewals
TD Investment Conclusion
The Big-Six banks report Q4/22 results from November 29 to December 1. We expect Q4/22E EPS to be down 2% y/y (down 1% q/q). Weaker EPS growth reflects 10% PTPP growth, offset by much higher PCLs off of a very low level of credit losses in Q4/21. Our estimates call for a 4-5bps performing loan reserve build in Q4/22 (consistent with Q3/22). Impaired loan losses are expected to increase q/q, but remain low relative to historical levels.
We expect Q4/22E PTPP earnings to be up 10% y/y, reflecting very strong NII growth, offset by weak IB revenue (CMRR down 14% y/y) and a 3% y/y decline in fee revenue. Consistent with what we saw from the U.S. banks, we expect IB revenue to decline ~35% y/y and trading revenue to be flat. This quarter, much lower mutual fund and other wealth revenue should limit fee income growth.
This quarter, we expect the focus to be squarely on NII, NIM, and NII/NIM guidance. We also expect the conversation to shift to performing loan reserves for mortgages in the context of materially higher renewal rates.
We forecast NII increasing a strong 18-19% y/y this quarter, the strongest y/y improvement in more than a decade. The increase reflects 13% loan growth and 13bps NIM expansion y/y (5bps q/q). In our Industry Bulletin report, we argue that balance-sheet structure will play a material role in relative NIM performance across the group. Significant excess deposits in the U.S. support higher securities balances, which we estimate price roughly two-times faster than loans in a rising interest rate environment. In Canada, where loans are greater than deposits, greater reliance on wholesale funding could lead to different NIM and NII performance. The shift to term deposits from demand deposits, mortgage competition, lower prepayment fees, and balance-sheet structure support RY and BMO more favourably over CM and BNS. We expect CM and BNS to report weaker NII growth than their peers.
Effective with this report, we are downgrading CIBC to HOLD from Buy. The logic in the downgrade relates to our expectation that CIBC's balance-sheet structure and business mix (loans to deposits, wholesale funding, overweight mortgages) will lead to negative adjustments to consensus estimates and ultimately performance. Among the large-cap banks, we rate RY and BMO BUY; and favour the insurers over the banks.