cibc analyst : Price Target (12-18 mos.): C$33.00Our Conclusion
The only change coming out of the quarter is higher expenses related to a revised strategic plan. Capital is in good shape, there are no apparent liquidity issues and credit performance looks fine. With the stock trading at 0.4x P/BV, we expect there will be a material re-rate either higher or lower at some point. There was nothing in the quarter to suggest lower. We wait for a new strategic plan this spring to see if there are reasons to get behind a positive re-rate. For now, there is no change to our price target or Neutral rating.
Key Points
Revising our 2024 EPS estimate for higher expenses. We have revised our F2024E EPS down by 8% to incorporate higher operating expenses. Expenses were higher than expected in FQ1 and management guided to higher required expenses to execute on a revised strategic plan. Our F2025E declines only 1% as we assume the company will target efficiency improvements in future years.
Details on strategic plan coming this spring. Early stages of a new strategic plan are taking place. Two new executive appoints have occurred in 2024 and the company created a strategy and transformation office. Limited other information was provided. The strategic reveal is planned for spring.
Expenses to run higher for now. The efficiency ratio came in at 72%, ~2% higher than last quarter. Based on guidance, we expect the efficiency ratio to increase next quarter due to a combination of revenue challenges and continued spend on the development and execution of the revised strategic plan. We forecast an efficiency ratio of 71% in F2024 and 69% in F2025. Prior management was targeting <65%.
NII expected to be down despite NIM stability. NII increased a little over 1% Q/Q, with all of that coming from NIM expansion (+4bps). NIM increased due to lower liquidity levels and lower funding costs. The company guided to these trends continuing into FQ2, resulting in stable NIM and a slight decline in NII. We forecast NII to decline by ~2% sequentially in FQ2.
Loan growth headwinds will persist. Loan growth of -1% this quarter was expected, and should continue for the near future. Dealers and manufacturers remain cautious on inventory financing; utilization rates this quarter were 50% vs. a typical ~55%. There has also been a slowdown in real estate construction starts.
Credit holding in just fine. The PCL ratio of 18bps this quarter was flat sequentially. There was no change to 2024 PCL guidance of high teens to low 20s. We forecast a 2024 PCL ratio of 21bps. Capital above target. CET1 ratio of 10.2% was up 30bps this quarter, driven by lower RWA (30bps) and earnings, net of dividends (10bps). Management targets a CET1 ratio >10%, which implies LB has excess capital.
Price Target Calculation
We derive our $33 price target by applying a 7.2x PE multiple to our F2025 EPS estimate of $4.56. The multiple implies an 18% discount to its historical multiple given the higher sensitivity to recessionary risks.