Wednesday, April 29, 2009

Macquarie's Ratings on Banks

Macquarie Capital Markets, Sumit Malhotra, 29 April 2009

BMO - Underperform,
CIBC - Neutral, $48 target price
National Bank - Neutral, $43 target price
RBC - Neutral, $40 target price
Scotiabank - Underperform, $30 target price
TD Bank - Underperform, $42 target price.
Financial Post, David Pett, 30 April 2009

The pre-provision, pre-tax earnings (PPE) of Canada's banks are more than ample to cushion the impact of rising loan losses, says UBS analyst Peter A. Rozenberg.

"We think that PPE are the most important line of defence against projected credit losses, he said in a note to clients. "We project significant PPE of $34-billion in F2009 compared to $9.3-billion in projected provisions.

Mr. Rozenberg said Canadian banks have historically enjoyed strong provision coverage with PPE:PCLs no less than 1.5x. Currently, the analyst noted the average coverage is 3.6x with National Bank at 7.3x and Bank of Nova Scotia at 4.8x, leading the pack. Bank of Montreal at 2.5x would be the lowest.

He added that PPE is also a good way to judge bank valuations and following the recent rally in the sector, Canadian banks are now trading at 5.4x PPE, compared with their historical average of 5.6x. CIBC and Bank of Montreal trade at the most attractive valuations, he said, while Royal Bank and Bank of Nova Scotia trade modestly above average, TD is below average and National Bank trades higher than average.

"Lower valuations at TD and BMO likely reflect lower implied US returns while discounts at CM likely reflect higher [collateralized loan obligations] risk," he wrote. "The relative premium valuation at NA is likely due to lower than average provisions and higher implied returns."