Bank of Montreal and Toronto-Dominion Bank to a sector perform on Sunday. The price target of the former was reduced from $163 to $151, citing earnings headwinds and uncertainties surrounding the firm’s planned acquisition of San Francisco-based Bank of the West, on which the expected timeline was pushed from the first quarter to the second of 2023. The analysts are of the view that BMO will have a hard time repeating earnings booked in fiscal 2021 from its securities holdings, which reached $591 million on the back of favourable market conditions. However, such frothy equity markets and narrow credit spreads are beginning to turn, according to experts.
In the case of TD, the analysts reduced the price target from $110 to $100, citing reasons similar to that of BMO. Dechaine and his team do not expect the firm to close its US$13.4 billion acquisition of First Horizon Corp. until the second quart of next year, which is few months later than previously anticipated.
Moreover, the analysts pointed to the elimination of overdraft fees by TD if they are US$50 or less, following widespread backlash in the United States. The Canadian lender is expected to take a negative revenue hit of US$250 million on an annualised basis during the second half of 2023, as a result. Although the overdraft revenue accounts for only one per cent of the firm’s consolidated revenue, the report said its impact on the earnings is expected to be bigger since there are no material operating costs attached to them.
Considering global economic uncertainty and volatile markets, the National Bank analysts say they have taken a “more cautious” stance on the Canadian banks. “Clearly, the world has changed in a very short time frame. And it could easily revert to a more positive backdrop in short order,” Dechaine wrote in a note to clients. “However, the balance of factors in the near-term are more negative than positive, in our view.”
