Barclays analyst John Aiken thinks capital market revenues and a sustained tailwind from credit performance are likely to drive the bottom line results for Canadian banks in the first quarter of 2022.
“Heading into Q1, the dual ‘X factors’ of credit and CMRev that played out for much of 2021, could emerge to kick off FY22,” he said in a research note released Monday. “The ongoing improvement of the macro outlook will likely continue to fuel a positive credit performance, while equity market highs and strengthening commodities could boost trading/market-related revenues, although industry league tables for investment banking are somewhat mixed. Prospective BoC rate hikes and a higher, albeit flattening yield curve will likely keep margins steady, while moderating but record 2021 home sales continue to be supportive for mortgage and asset growth. As such, we anticipate net interest income will trend higher, and following a ‘kitchen sink’ Q4, NIX will likely ease.
“And finally, on the capital front, after the cornucopia of dividend hikes and share repurchases announced in Q4, we anticipate no net new capital activity, while CET1 ratios continue to strengthen.” Mr. Aiken thinks credit results could again surprise to the upside, emphasizing the economy and employment landscape are “climbing back above pre-pandemic levels, and rate hikes coming as soon as March, it appears that the banks may have managed to side-step the potential delinquencies and credit losses than had previously been anticipated.”
He added: “With the ongoing improving macro outlook, we would not be entirely surprised if credit continues to surprise to the upside. CMRev could be an ‘X factor’, while NII will likely strengthen. Although Q1 is seasonally the strongest quarter for capital market revenues (CMRev), underscored by historically robust trading, industry league tables suggest somewhat mixed investment banking (-underwriting issues/+completed M&A deals). With record 2021 home sales spurring solid mortgage growth, and margins likely holding steady, we anticipate net interest income will continue to trend higher from Q4. Expect NIX to ease, while capital edges higher. Following a ‘kitchen sink Q4′, we anticipate NIX to moderate to
kick off FY22. And, after the plethora of dividend hikes and share buybacks announced in Q4, we anticipate no net new capital activity in the quarter, as CET1 ratios continue to strengthen from the end of 2021.” Mr. Aiken also emphasized rising rates which could further multiple expansion for bank stocks.
With that view, he make a series of target price changes. They are:
- Bank of Montreal (
, “overweight”) to $167 from $165. Average: $158.94. - Bank of Nova Scotia (
, “equalweight”) to $97 from $96. Average: $94.66. - Canadian Imperial Bank of Commerce (
, “equalweight”) to $170 from $169. Average: $166.73. - Canadian Western Bank (
, “overweight”) to $43 from 41. Average: $42.91. - Laurentian Bank of Canada (
, “equalweight”) to $45 from $44. Average: $46.50. - Royal Bank of Canada (
, “overweight”) to $158 from $157. Average: $145.31. - Toronto-Dominion Bank (
, “overweight”) to $39 from $41. Average: $107.81.
“The relatively positive macro outlook will likely continue to spur better than expected credit, providing a valuable boost to the bottom line, and will likely bridge the gap to higher rates and stronger top line growth. While markets-related revenues could continue to provide a valuable offset to net interest income pressures, looming rate hikes should bode well for the banks, and potentially drive higher valuation multiples,” he said.