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Financial Sector Update for 02/15/2017: BMO.TO, BNS.TO, CM.TO, NA.TO, RY.TO, TD.TO, LB.TO, CWB.TO

Canadian Banks begin reporting Q1/17 results on Feb. 23rd.

Credit Suisse is expecting EPS growth of 7% YoY on average, a 100 bps acceleration from 6% last quarter and the highest pace of growth since Q4/15. Forecasts reflect strong double-digit growth in Wealth, high single digit-growth in Capital Markets and International, and mid-single digit growth in Canadian Banking. Lower provision for credit losses are expected to be a tailwind for several banks this quarter (NA, RY, TD).

Canadian Retail: Credit Suisse's 5% earnings growth for Q1/17 appears achievable. Bank of Canada data shows stable loan growth of 5% with personal lending moderating (+4% YoY) offset by stronger business growth (+8% YoY). Unemployment is down from recent highs in early 2016, which is supportive for credit. NIMs and housing will continue to be in focus given the move in interest rates and a number of mortgage market regulatory changes coming into effect in Q1.

Interest Rate Sensitivity: The brokerage expects stable-to-slightly-higher margins for BMO, RY and TD's U.S. operations and believe higher rates are not yet fully reflected in estimates. Also expecting margin expansion for BNS' International business, which could support near-term growth.

All banks remain focused on reducing expenses with most having explicit cost reduction targets. Forecasting non-interest expense ratios in Canadian banking to improve by 60 bps YoY on average.

Dividend Increases: Expect BNS and RY to increase dividends 2-3% and forecasting a 7% increase for TD (annual). Average payout ratio for the Big-6 on 2017E is 46%.

Valuation: 3% Above Average.

Top picks: RY and TD: 1) RY is one of the better performing banks YTD. Credit Suisse expects EPS to benefit from strong Wealth & Capital Markets results and improved performance from Canadian Banking;

2) TD is lagging peers and relative valuation has become more attractive. Better performance in Canadian Retail is needed to improve sentiment but earnings will be supported by good U.S. results. Easier comps on PCLs should also benefit the bank in Q1.

Full ranking: RY (Outperform), TD ( OP ), BNS (Neutral), BMO (N), CWB (N), CM (Underperform), NA (UP), LB (UP)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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