Rising interest rates are generally expected to favor Canada’s big banks, but a group of analysts are cautious about their share prices in the broader economic context.
Analysts at the Canadian Imperial Bank of Commerce came out this week with target price cuts across the board for large Canadian banks, arguing that the macroeconomic picture is becoming less secure and could pull off results in 2023.
CIBC analyst Paul Holden cut the price targets of seven banks by an average of five percent: Bank of Nova Scotia ($ 94 to $ 86), Bank of Montreal ($ 150 to $ 142), Royal Bank of Canada ($ 149 to $ 146), and Toronto-Dominion Bank. ), National Bank of Canada ($ 102 to $ 100), Canadian Western Bank ($ 38 to $ 34) and Lorentian Bank ($ 44 to $ 41). CIBC analysts do not maintain a rating or price target at CIBC.
Holden and his team cut one per share for 2022 and four per cent for 2023 in anticipation of debt growth and higher credit losses.
While National Bank and RBC cut their target prices, the team gave them an “outperformer” rating due to the lower valuation gap between their peers, indicating a lower risk and a more defensive position in a recessionary environment.
In a note addressed to clients, Holden argued that banks currently set in-line pricing with a five-year average value from a book value multiple of 1.7x, or not accounting for the same rate and economic downturn as expected in a typical economic situation.
“If the outlook for the economic situation continues to be challenged, there is a negative risk to the assessment,” Holden wrote.
While Holden expects banks’ forthcoming second-quarter earnings report to be driven by more than two percent quarterly-over-quarter debt growth, he noted that “headline results are not so important” as market prices rise due to the recession as an economy.
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Concerns about the slumping macroeconomic outlook were echoed in a May 15 note by National Bank analyst Gabriel Dechain, who wrote that he expects a volatile macroeconomic and geopolitical context to make provisional reversal between banks this quarter.
CIBC analysts also point to the downturn in the residential mortgage market and business debt, which is expected to affect results after the second quarter.
The target cut comes at a time when Bank of Canada stocks are down, down five to 11 percent from the beginning of the year, with steeper declines from sector highs in February. Scotiabank fell the most in the Big Five this year, falling 11 percent to $ 80.55.
Nigel D’Souza, a Veritas Research investment analyst, could be the first of five major Canadian banks to issue a downgrade from “buy” to “sell” in February, fearing an economic downturn. Bank of Montreal is the only bank that was saved due to the acquisition of Bank of the West.
The Big Five banks will report their second-quarter results next week, starting May 25 with Bank of Montreal and Scotiabank, then May 26 via RBC, TD, and CIBC.