Post by
lb1temporary on Jun 05, 2021 5:23am
CIBC: Canadian Banks – FQ2 Post View
Continue To See Sources of Upside
Our Conclusion
Bank stocks have handily outperformed the TSX Composite YTD. Investors are rightly asking if all the optimism has been priced in. F2022 consensus EPS certainly looks more appropriate as it has only now pushed above prepandemic levels (1% higher on average). However, we see potential upside to EPS from NIM expansion and capital deployment, which we believe are high-probability scenarios. We also think valuation multiples, which are only a snick above average, could have more to give given the positive backdrop. We continue to like potential upside for the banks broadly and have a preference for names where consensus remains conservative, with visible potential catalysts. This points us to TD, BNS and CWB.
Key Points
We maintain our positive thesis on the banks, premised on:
1) Outlook for loan growth. Loan growth averaged only 0.8% in FQ2, but the trends for unsecured personal credit and credit cards improved vs. last quarter. There were also pockets of strength for business loans with six of eight banks posting sequential growth. We expect a more normalized rate of growth by FQ4, consistent with management outlooks and supported by a strong demand backdrop.
2) Interest rate optionality. This became a central topic this quarter given the possibility that central banks increase rates in 2022. Disclosed net interest income (NII) sensitivities suggest there is 1.0-1.5% EPS upside from a single 25bps increase for most banks. TD is significantly higher at around 5%.
3) Excess capital as a source of upside. All of the banks have built excess capital and deployment of that capital towards share repurchases and/or acquisitions represents potential upside to EPS estimates. We estimate upside at 3%-6% for most banks and TD closer to 8%.
4) Credit trends as a tailwind. PCL updates were a positive in terms of FQ2 EPS relative to consensus estimates and contributed to positive EPS revisions for future periods. We expect further performing allowance releases, adding to capital levels and reducing P/BV multiples. We estimate that TD and RY have the most allowances to give back.
5) Valuation multiples around average. The group is trading a snick above historical averages at 11.0x P/E (avg. is 10.8x) and 1.8x P/BV (avg. is 1.7x). Multiples are not stretched and there are good arguments why banks should trade at higher-than-average multiples today