29 October 2012

Scotia Capital Introduces Guesstimates for Banks' 2014 Earnings

Scotia Capital, 29 October 2012

Introducing 2014 Earnings Estimates for Canadian Banks - 9.0% Growth

• We are introducing our 2014 earnings estimates for Canadian banks with expected earnings growth of 9.0% versus 7.6% earnings growth in 2013.

• We believe the bank group's profitability will remain strong in 2014 with ROE expected at 17.5%, down slightly from 18.0% in 2013. CM is expected to lead in terms of ROE at 21.0%, followed by RY and NA at 18.8% and 18.3%, respectively. We estimate RRWA to be very strong at 2.45%, up from 2.35% in 2013, with CM leading the bank group at 3.02% followed by TD and RY at 2.76% and 2.44%, respectively.

• Earnings growth is expected to be led by Wholesale banking earnings as capital markets activity normalizes and Canadian banks gain market share. Wealth Management earnings growth is also expected to be solid.

• We expect domestic Retail banking earnings growth to be 7%-8%, with moderate loan growth and stabilizing retail net interest margins. We believe cost controls will be a major focus for the banks in this segment.

• Banks with International exposure are expected to have higher earnings growth relative to domestically focused banks in 2014.

• We believe share repurchase announcements will accelerate in 2014 as the banks continue to generate excess capital at a high rate. Earnings accretion from share repurchase is expected to offset the potential for weaker-than-expected operating environment.

Increasing Our Share Price Targets for BNS, CM and RY

• We are increasing our share price targets for BNS, CM, and RY to $65, $95 and $70 from $62, $93, and $68, respectively.

Valuation Compelling - Remain Overweight

• Bank valuations remain compelling with P/E multiples very attractive at 11.4x, 10.2x, and 9.4x trailing 2013E and 2014E.

• We maintain 1-Sector Outperform ratings on TD, RY, and CM, with 2-Sector Perform ratings on CWB, BNS, and LB, and 3-Sector Underperform ratings on BMO and NA.