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CIBC lowers rate targets for large Canadian banks as macroeconomic picture becomes less certain

It cut target rates for seven banks by an average of five percent

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Higher interest rates are generally expected to work in favor of major Canadian banks, but one team of analysts is taking a cautious stance on their stock prices given the broader economic background.

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Analysts at Imperial Bank of Canada came out this week with comprehensive target rate cuts for large Canadian banks, arguing that the macroeconomic picture is becoming less certain, and could affect results in 2023.

CIBC analyst Paul Holden cut the target rate for seven banks by an average of five percent, lowering Bank of Nova Scotia (from $94 to $86), Bank of Montreal (from $150 to $142), and Royal Bank of Canada (from $149 to $146), Bank of Toronto Dominion ($103 to $100), National Bank of Canada ($102 to $100), Western Bank of Canada ($38 to $34) and Laurentian Bank (from $44 to $41). CIBC Analysts do not maintain a rating or target price for CIBC.

Holden and his team cut future adjusted earnings per share by 1% for 2022 and by 4% for 2023 in anticipation of slowing loan growth and higher credit losses.

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While the National Bank and RBC’s target rates were lowered, the team gave them a “best performer” rating due to lower rating gaps between their peers, which means lower risk and a more defensive stance in a recession environment.

In a note to clients, Holden argued that banks are currently priced in line with a five-year average rate of book value multiple of 1.7x, or roughly the same rate as would be expected in a normal economic scenario and not account for an economic recession.

“If challenges persist in the outlook for economic conditions, there is a downside risk to valuations,” Holden wrote.

While Holden expects strong results in bank earnings reports for the upcoming second quarter driven by loan growth of more than 2 percent on a quarterly basis, he noted that “key results may not matter much” as an economic. The slowdown is increasingly priced in the market.

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National Bank analyst Gabriel DeKayne echoed concerns about the deteriorating macroeconomic outlook in a note dated May 15, writing that he expects macroeconomic volatility and the geopolitical background to moderate the pace of performance of interbank provisioning reversals this quarter.

CIB analysts also pointed to a slowdown in the residential mortgage market and business loans that are expected to affect results after the second quarter.

The targeted cuts come at a time when Canadian banking shares have fallen, having fallen between 5 and 11 percent since the start of the year, with sharper declines from sector highs in February. Scotiabank has been down more than the Big Five this year, down 11 percent to $80.55.

Fears of an economic downturn led Veritas Research investment analyst Nigel D’Souza to be one of the first to downgrade five major Canadian banks from “buy” to “sell” in February. The only bank spared was the Bank of Montreal, in large part due to its acquisition of the West Bank.

The five largest banks will announce second-quarter results next week, starting May 25 with Bank of Montreal and Scotiabank, followed by RBC, TD and CIBC on May 26.

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2022-05-19 11:04:36

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