Financial Sector Update for 03/09/2016: YR.TO, NA.TO, TD.TO, BNS.TO, BMO.TO, CM.TO
Canadian banks managed to grind out another solid quarter with earnings growth of 6% led by international (FX assisted) with wholesale/capital markets relatively strong, particularly trading, although muted by Oil & Gas (O&G) provision for credit losses (PCLs). Wealth management had one of its toughest quarters and insurance was very weak.
International earnings growth was 21% in CAD and 6% in constant currency. FX tailwind should last for another 2 quarters with tougher comps expected in Q4/16. FX contribution to Q1/16 earnings was meaningful: BMO (3.4%), BNS (4.9%), CM (3.6%), RY (2.4%) and TD (5.1%).
Canadian Retail earnings were solid at 6% in a challenging environment with PCLs increasing 12% YoY with NIM mixed among banks and solid expense management.
O&G PCLs totaled a very manageable $259 million with annualized ratio of 2.05% led by RY at 5.06% with TD the lowest at 0.72%. The earnings impact was 2.2% in the quarter.
Dividend increases continued this quarter as expected with BNS, CM and RY in the 2% to 3% range and TD at 8% (once per year increase).
"We remain very constructive on the group with banks adjusting to the challenging environment continuing to build capital and grind out earnings growth. We believe bank valuations are extremely compelling, trading near Financial Crisis levels despite the significant reduction in systemic risk. The enfolding " Mini Credit Cycle" is very heavily discounted in our view," writes Credit Suisse.
Trimming EPS estimates at BNS and CWB to reflect weaker operating performance outlook.
RY remains Credit Suisse's top pick with OP rating followed by NA ( OP ) and Neutral ratings on TD, BNS, BMO in that order and Underperform on CM.
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