Investors are undervaluing
several Canadian banks
, but they are generally in good shape as they start reporting second-quarter earnings this week, says one research team.
“Despite elevated uncertainty in the macroeconomic outlook, with lingering risks of a potential trade war, we are generally constructive on the Canadian banks,” analyst Mike Rizvanovic and associate Felix Fang at the Bank of Nova Scotia said in a note. “We believe the group is as recession-ready as it has ever been.”
The pair especially like the banks for the “stability and resilience of their Canadian lending business.”
They said the banks are now better prepared for credit losses and have more “capacity to absorb a spike in losses,” while their tier-one capital ratios, which measure a bank’s financial resilience, have been built up since the COVID-19 pandemic by approximately 200 basis points.
Here’s how
six of the banks
(Scotiabank doesn’t cover itself) stack up.
Royal Bank of Canada
Rizvanovic and Fang
put RBC at the top
of the pack for a few reasons: it is a strong player in the Canadian market, its revenue comes from diversified sources, it has a “clean, long-term record” and there are still gains to be had from its purchase of HSBC Canada last year.
“On top of that, (RBC) tends to be the most trusted of its peers, making it the most popular choice for most Canadian bank investors during times of macroeconomic turbulence, which we are currently facing,” they said.
Price target: $188
One-year total return: 15 per cent (including dividends)
Canadian Imperial Bank of Commerce
“To put it bluntly, times change, and we do not believe that (
CIBC’s
) past missteps should have much bearing on how the stock is valued today,” the analysts said, noting it has easily beaten earnings expectations over the past six quarters.
That plus a healthy capital position that would allow it to buy back shares and a discounted valuation translate to good “upside” for the stock, they said.
Price target: $98
One-year total return: 14 per cent (including dividends)
National Bank of Canada
Rizvanovic and Fang placed
National Bank of Canada
among their top picks because its recent relative underperformance provides “investors with a favourable entry point.”
Investors appear put off by the risk of credit losses at National’s ABA Bank subsidiary and an “uptick” in provisions for credit losses in the last quarter.
But they think markets are underestimating “the sizable potential upside” from the acquisition of Canadian Western Bank.
Price target: $135
One-year total return: 11 per cent (including dividends)
Toronto-Dominion Bank
The pair think the recent rally in
TD’s stock
has run its course and recommend investors should stay on the sidelines until there is more clarity on how long the asset cap on the bank’s retail operation in the United States will last.
The cap was one of the penalties imposed by U.S. authorities in the anti-money laundering case, in addition to fines totalling US$3.1 billion.
Canada’s second-largest bank by market capitalization has a lot of idle capital it wants to put to work in this country’s retail market, but Rizvanovic and Fang said that will be tough because the landscape is already quite “mature.”
New chief executive Raymond Chun is expected to release a retooled strategy in the next few months. Until then, the analysts think it’s best to hold back.
“TD is clearly at an inflection point,” they said.
Price target: $90
One-year total return: Six per cent (including dividends)
Bank of Montreal
BMO
has struggled against a couple of headwinds, including sluggish growth in its U.S. lending segment — mostly on the commercial side — and credit losses, which have led to it missing earnings expectations in nine of the past 12 quarters.
“BMO appears to be past the worst of it, but, in our view, this leaves some lingering near-term uncertainty for investors in the current Canadian and U.S. macroeconomic backdrop,” Rizvanovic and Fang said. “We believe that adverse trend highlights a lack of execution that needs to improve before we become more constructive on the stock.”
Price target: $143
One-year total return: five per cent (including dividends)
Laurentian Bank of Canada
Laurentian
is a “show-me story for at least the next few quarters,” Rizvanoivic and Fang said while recommending investors wait to see if the bank’s new strategy yields any tangible results.
Further, “necessary” spending on tech could result in “unexpectedly high expenses,” they said.
Price target: $28
One-year total return: nine per cent (including dividends)
• Email: gmvsuhanic@postmedia.com
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Are the big banks a buy heading into earnings season?
2025-05-21 14:38:06
