Outlook for Canadian banks: NB analyst With third-quarter earnings season for Canadian banks set to begin next week, National Bank Financial analyst Gabriel Dechaine said the outlook for interest rates supports his “positive” stance on the sector.
“The Big-6 enter Q3/24 reporting season having underperformed the market by 200 basis pointss since Q2/24 (approximately 600bps underperformance year-to-date),” he said. “Despite our conservative EPS revisions ahead of the quarter, we remain positive on the sector overall.
“A sufficient level of rate cuts should allow Canadian banks to avoid a sharp uptick in loan losses, as we’ve seen in previous downturns. As it stands, our Economics team is forecasting an additional 50bps of rate cuts by the end of the year, with a further 100bps expected in 2025. Separately, the group is well capitalized, and the regulatory environment has become more supportive.”
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In a research report released Friday, Mr. Dechaine made small “tweaks” to his credit expectations, increasing his sector provisions for credit losses (PCL) ratio to 47 basis points from 45 basis points, previously, to reflect a “general sense of conservatism, given rising insolvencies in Canada, potential commercial impairments and losses in some consumer categories (e.g., auto).” He also trimmed his net interest margin projection, estimating sequential compression of 1-2 basis points, down from flat to modest increases previously due to “Weak loan growth and funding cost pressures.”
From a stock-specific standpoint, Mr. Dechaine said he favours banks with relatively higher domestic focus.
“That puts CM and RY at the top of our pecking order,” he said. “Incidentally, they are two of the three banks that have outperformed the market this year (NA is the other). We are also Outperform-rated on BMO, a bank that faced the steepest EPS revisions we made this quarter. The overhang related to its credit performance, sluggish loan growth and U.S. exposure in general will likely persist until after the November U.S. election and the Fed begins to shift towards a rate cutting cycle. Translation: patience is required.”
The analyst made three target price reductions to the seven stocks in his coverage universe. They are:
- Bank of Montreal (
, “outperform”) to $131 from $136. The average on the Street is $127. - Royal Bank of Canada (
, “outperform”) to $160 from $161. Average: $153.05. - Toronto-Dominion Bank (
, “underperform”) to $74 from $75. Average: $86.04.
His other targets are:
- Bank of Nova Scotia (
, “sector perform”) at $66. Average: $67.74. - Canadian Imperial Bank of Commerce (
, “outperform”) at $78. Average: $73.09. - Laurentian Bank of Canada (
, “underperform”) at $26. Average: $26.73. - EQB Inc. (
, “sector perform”) at $95. Average: $105.30.