Post by
lb1temporary on Jun 03, 2021 7:33am
TD: Q2/21 Large Banks Review
Consensus 2022E EPS Up 14% Since the Beginning of 2021 As CMRR Slows,
Next Leg of Growth from NII and Banking Fees
TD Investment Conclusion
Q2/21 EPS was up 152% y/y, reflecting PTPP growth of 5% and a decline in PCLs of 99%. For the second consecutive quarter, all six banks delivered record EPS and beat consensus estimates by an average of 13%. Better-than-expected results reflect strong capital markets revenue (particularly underwriting/advisory revenue), improving fee income (a variety of banking fees and hedging gains), and lower expenses. NII was generally lower than expected as NIM was slightly weaker (although up slightly q/q). The sharp decline in PCLs reflect much lower impaired loan PCLs (BNS was an exception) and greater-than-expected releases of performing loan reserves.
At 38% y/y, BMO's PTPP earnings growth was again the highest in the group by a wide margin (group PTPP grew 5% y/y). BMO's much stronger PTPP earnings growth was driven by a 700bps decline in the NIX ratio, 68% increase in CMRR, and much better NIM performance in Canadian and U.S. P&C segments. Regarding BMO's very strong efficiency improvement, as BMO's NIX declined sharply in Q3/20, we do not see efficiency driving material outperformance for BMO in Q3/21. TD's 14% decline in PTPP reflects how the partners' card programs are accounted for. We put PTPP growth at nil in Q2/21, adjusting for what we consider to be a highly questionable accounting requirement.
Consensus 2022E EPS was up 8% following Q1/21 reporting and a further 6% following Q2/21. At 14% YTD, the increase in consensus estimates is greater than any other year for which we have data. The previous high was an 8% increase in 2010E EPS in 2009. We believe that IFRS 9 and the sharp changes in performing loan PCLs account for the significantly greater volatility in consensus estimates than what was observed before the application of IFRS 9 in Q1/18. Having said that, a combination of momentum in estimates and the potential for sizable dividend increases in the near term support taking our group target P/E up to 11.5x-12.0x. We have raised our target prices accordingly.
We maintain our OVERWEIGHT stance on the banks, but we favour the insurers (Manulife and Industrial Alliance) that are trading at a discount to their peers over the banks. Our outlook is influenced by the view that Q1/21 will be seen as an anomaly for the insurers. Specifically, we believe that the move in interest rates and the resulting impact on reported earnings and LICAT that impacted investor confidence in Q1/21 will give way to a focus on the underlying fundamentals in Q2/21. Looking out to H2/21 and 2022, we expect the banks with greater rate sensitivity and card portfolios, and more generally, more room for improvement in non-CMRR fee income, to outperform. In this context, we favour Royal and BNS over BMO and NA.