cibc analyst: Price Target (12-18 mos.): up to C$68.00Our Conclusion
Our EPS estimates are little changed. BNS is trading at an 8% discount to the group average P/E. There was nothing in the FQ2 results to suggest that the valuation discount will narrow in the near term. We maintain a Neutral rating. We bump our price target from $64 to $68 on higher valuation multiples for the group. Our revised price target uses a P/E multiple of 9.6x vs. 9.0x previously.
Key Points
Credit losses to remain elevated, but for how long? There were no negative surprises in the quarter from a credit trend perspective. Impaired PCLs and gross impaired loans are climbing at a modest pace. Management is sticking to its 2024 PCL guidance of 45 bps-55 bps but with a bias to the upper end of the range for FQ3 and FQ4. Our assumptions for FQ3 and FQ4 impaired PCLs were basically already there (increase slightly). The real question is around the right assumption for F2025 PCLs, particularly if interest rates in Canada prove a little more sticky. We assume a F2025E PCL ratio of 51 bps and consensus is at 53 bps, implying an expectation for elevated credit losses for another year.
International Banking trending better, not quite bullish yet: Results have improved primarily due to NIM expansion (+37 bps Y/Y) and expense discipline (operating leverage of 5%). However, PCLs are elevated and loan balances are contracting. Given policy rates have come down in most regions where BNS operates, we do expect PCLs and loan demand will improve. There is still a lot of work to do in terms of capital optimization and client focus, which makes it really tough to forecast balance sheet and earnings growth in the near term in the International segment. We will wait and see how results here develop.
Capital position has improved, providing strategic flexibility: CET1 of 13.2% was better than forecast and reinforces the view that the DRIP discount will be turned off next quarter. We estimate that Basel III floors will reduce CET1 by >40 bps in each of F2025 and F2026. BNS should be building capital organically by 50 bps-60 bps per year and further capital optimization is planned. Management of Basel III floors looks well in-hand. We can’t help but wonder if excess capital is being built to provide flexibility for future strategic actions, such as acquisitions or dispositions.
Loan balances shrinking, NIM expanding: Total average loans are down 2.5% Y/Y with wholesale down the most (-13%). However, NII has increased nearly 5% Y/Y thanks to NIM expansion. BNS is uniquely positioned, with 25 bps of rate cuts estimated to increase NII by ~$100MM annually. Funding mix is improving, with the proportion of wholesale down and demand deposits growing faster than term. We assume 6 bps of NIM expansion in F2024E and 3 bps in F2025E.