Scotia Capital Following its earnings season, Scotia Capital analyst Meny Grauman sees an interest rate cut as the next notable catalyst for Canada’s banking sector, however he is not sure of the long-term impact.
“Canadian bank earnings season included some big surprises and also some big moves in the shares,” he said. “In fact, if we compare the best-performing Big Six bank stock this earnings season (RY) against the worst-performing stock this earnings season (BMO), we get a delta of roughly 970 bps. Results generally came in better than expected, although clear signs of credit stress emerged as a result of the “higher for longer” rate environment. The rate outlook continues to be the most important single variable for this sector, and we believe that a BoC rate cut in June is likely to spark a rally in the shares even as we question how sustainable it will be. ETF flows suggest that investors are getting more positive on the space despite the growing concerns about rising loan losses. Although Canadian economic performance continues to lag the U.S., we continue to see better P&C results domestically and believe that rate cuts in Canada will only sharpen that divide, at least in the short term.”
For the quarter, core earnings per share for the industry came in at $2.17, flat quarter-over-quarter but up 3 per cent year-over-year. On average, results for the Big Six banks topped Mr. Grauman’s projections by 4 per cent and the Street by 3 per cent.
“On the face of it, Q2 was the quarter in which the implications of ‘higher for longer’ became more tangible in results,” he said. “That said, relative to expectations, results skewed positively among the Big Six banks with BNS, CM, NA, RY, and TD all beating, and only BMO missing (again). Among the smaller banks, EQB beat, as did LB (underlying results here were weaker), while CWB missed. In our view, RY put up the best results of the earnings season, followed by CM which continued to deliver on its guidance. We would rank NA a close third. Meanwhile, BMO delivered the weakest result of the quarter of the group for the second quarter in a row, missing the Street by 6 per cent as loan loss provisions came in well ahead of consensus. Among the smaller banks, EQB clearly put up the best result of the quarter, led by 10 bps in sequential margin expansion that we believe is sustainable.”
His other targets and ratings are:
- EQB Inc. with a “sector outperform” rating and $113 target. Average: $105.30.