Monday, February 20, 2006

RBC CM's Preview of Cdn Bank Q1 2006 Earnings

RBC Capital Markets, 20 February 2006

Cash EPS Growth Estimated Up 7% YoY. We are estimating 7% YoY cash EPS growth for Q1/06. Our estimated growth is indicated highest at RY (driven by continued broad-based revenue growth and operating leverage), followed by BNS (International divisional growth, now less adversely impacted by currency) and BMO (on revenue growth and operating leverage gains). Our TD estimate excludes over $2 in gains, preannounced for the TD Waterhouse USA vend-in and a dilution loss on Banknorth’s Hudson United acquisition.

Accelerating Revenue Growth. For Q1/06, we are estimating 10% YoY revenue growth, still up 8% excluding the impact of TD’s Banknorth acquisition. Measured either way revenue growth is well through the 0-5% range of 2005. We look for a sequential up-tick in retail spread and growing corporate/commercial loan volumes to contribute to already solid wealth and wholesale activity. After years of dull revenue growth, a positive trend could drive strong operating margin gains and EPS surprises, particularly at high-momentum banks RY, NA, TD, and now also at BNS.

Credit Solid. Despite large percentage increases, the dollar impact of normalizing credit losses should have only muted EPS impact from the current low level. Our normalized loan loss provision estimates for the group are indicated up 23% QoQ and 37% YoY, purely on a return to more normal, run-rate levels rather than as a result of impaired loan developments that we expect to remain very low. We are looking for an increase in LLP/L&A to 0.30% versus 0.25% in Q4/05 – in our view, 0.30-0.35% should now be the cycle-neutral average. This level of credit provision remains very manageable with only moderate EPS impact at the current low levels. In our view, heightened sensitivity to wider corporate bond spreads, auto industry issues and/or currency woes for small domestic manufacturers will not be showing up in impaired loan development.