Scotia Capital, 19 August 2013
Banks begin reporting third quarter earnings on August 27. We expect underlying operating earnings to increase 4% YOY and 3% QoQ. Our earnings estimates are in line with consensus. ROE 17.0% (18.0% excluding TD), RRWA at 2.25% (2.31% excluding TD).
Implications
• We expect Wholesale earnings to remain strong, up slightly both sequentially and YoY. Domestic/Retail Banking earnings are expected to remain resilient although growth is slowing, with Wealth Management earnings expected to be strong, aided by AUM growth. Wholesale is expected to be benefit from solid fixed income underwriting, strong equity underwriting, and continued strength in corporate lending.
• We expect TD, BNS, RY, and BMO to increase their dividends 4%, 3%, 3%, and 2%, respectively.
• Bank P/E multiples, we believe, are very attractive at 11.2x and 10.2x our 2013E and 2014E EPS. We believe housing concerns and short interest are muting bank valuations and P/E expansion. We expect Canadian bank P/E multiples to hit 15x trailing in 2015 as systemic risk continues to decline, housing concerns moderate, and investors chase banks' high dividend yields.
Recommendation
• We maintain our overweight Canadian banks versus the TSX and our overweight U.S. banks versus Canadian banks recommendations.
• We maintain CM as our FS; an SO rating on RY; SP ratings on TD, BNS, NA, CWB and LB; and SU rating on BMO.
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Banks begin reporting third quarter earnings on August 27. We expect underlying operating earnings to increase 4% YOY and 3% QoQ. Our earnings estimates are in line with consensus. ROE 17.0% (18.0% excluding TD), RRWA at 2.25% (2.31% excluding TD).
Implications
• We expect Wholesale earnings to remain strong, up slightly both sequentially and YoY. Domestic/Retail Banking earnings are expected to remain resilient although growth is slowing, with Wealth Management earnings expected to be strong, aided by AUM growth. Wholesale is expected to be benefit from solid fixed income underwriting, strong equity underwriting, and continued strength in corporate lending.
• We expect TD, BNS, RY, and BMO to increase their dividends 4%, 3%, 3%, and 2%, respectively.
• Bank P/E multiples, we believe, are very attractive at 11.2x and 10.2x our 2013E and 2014E EPS. We believe housing concerns and short interest are muting bank valuations and P/E expansion. We expect Canadian bank P/E multiples to hit 15x trailing in 2015 as systemic risk continues to decline, housing concerns moderate, and investors chase banks' high dividend yields.
Recommendation
• We maintain our overweight Canadian banks versus the TSX and our overweight U.S. banks versus Canadian banks recommendations.
• We maintain CM as our FS; an SO rating on RY; SP ratings on TD, BNS, NA, CWB and LB; and SU rating on BMO.
