21 August 2017

Preview of Banks' Q3 2017 Earnings

Scotia Capital, 21 August 2017

• Despite the favourable combination of strong operating performance (13% YoY EPS growth in 1H/17) and a resurgent domestic economy that underpinned the first rate hike from the BoC in seven years, Canadian bank stocks have run in place for much of 2017, with the TSX Bank Index having moved a grand total of 1% (to the downside) 7.5 months into the year. While we expect that the upcoming Q3/17 results from the sector will continue to show solid financial performance, in our view the stall of the stocks has more to do with questions regarding the health of the Canadian housing market, particularly as sales activity in Toronto has moderated in recent months.

• The group enters reporting season trading at 11.2x our 2018E, down a full-point from the 12.2x peak that was seen in early-March. With the housing conversation remaining at the forefront, we think the key area of focus for investors will be the ability of the group to demonstrate EPS offsets in other parts of the business (net interest margin [NIM] expansion, operating leverage, growth in US / International segments), an important consideration given that 2018E revisions have been limited to ~1% so far this year.

• Given that the dispersion between the individual stocks has been limited (8% band between the best-and-worst performers within the 'Big Six' YTD), the combination of relative valuation and potential inflection points in key fundamental trends has taken on greater importance in our stock selection process. Accordingly, we are upgrading our rating on TD to a SO, and balancing this move by lowering RY to a SP.

• Bank of Montreal (BMO, $91.53, SO, $103.00) – Target priced decreased from $104.00
• Canadian Imperial Bank of Commerce (CM, $106.94, SP, $120.00) – Target price increased from $118.00
• National Bank of Canada (NA, $55.29, SO, $61.00) – Target price increased from $60.00
• Royal Bank of Canada (RY, $92.25, SP, $100.00) – Rating cut from Sector Outperform and target price decreased from $102.00
• TD Bank Financial Group (TD, $63.73, SO, $73.00) – Rating raised from Sector Perform and target price increased from $71.00