TORONTO (CU)_Interest rates are currently on the rise in Canada, and this is generally expected to work in favour of the country’s big banks. However, analysts at CIBC have decided to take a cautious stance on their share price targets given the wider economic implications.
Across-the-board target price cuts for Canada’s big banks were announced by analysts at the Canadian Imperial Bank of Commerce, as they argued that the macroeconomic picture continues to become less certain, with potential of dragging on results in 2023. Price targets for seven major banks were slashed by five per cent on average, while forward-looking adjusted earnings per share were also reduced by one per cent for 2022.
Accordingly, CIBC analyst Paul Holden and his team cut their price targets for the Bank of Nova Scotia from $94 to $86, for the Bank of Montreal from $150 to $142 and for the Royal Bank of Canada from $149 to $146. Toronto-Dominion Bank, National Bank of Canada, Canadian Western Bank and Laurentian Bank also had their target prices trimmed from $103 to $100, from $102 to $100, from $38 to $34 and from $44 to $41, respectively.
According to Holden, banks are currently priced in-line with a five-year average price to book value multiple of 1.7x or the same rate expected under normal economic circumstances and has therefore failed to take an economic recession into account. “If the outlook for economic conditions continues to be challenged, then there is downside risk to valuations,” he said in a note to clients.
While he projects banks to report strong results in their upcoming second-quarter earnings, driven by a more than two per cent loan growth from the previous quarter, however, as an economic slowdown is also being priced into the market, “headline results might not matter all that much”, he said.
