EVENTS:   Acceleration in the Energy Transition - David Scott/CHA-AM Advisors - 12 May 26     ROADSHOWS: Consumer Research & Industry Trends focused on US Retail, E-Tail, and Consumer Products Companies - Scott Mushkin /R5 Capital   •   London   07 - 08 May 26       US Equity Short Research & Strategy - Zach Shannon /Corto Capital Advisors   •   New York   18 - 19 May 26       Investing in Constraint: Governance, Scarcity, and the Next Phase of the Energy Transition - François Boutin-Dufresne & Félix-A. Boudreault & Lenka Martinek /Sustainable Market Strategies   •   London   18 - 19 May 26      
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The Cut

Fortnightly publication highlighting latest insights from IRF providers

Company Research

Financials

Report by Veritas Investment Research

BMO reported 1Q24 results that fell short of expectations on weaker net interest margin performance, lower capital markets revenue and higher credit loss provisions. Veritas continues to see upside risk for credit losses for BMO in a recessionary environment on greater exposure to US banking and commercial lending. They expect adjusted EPS to decline by double-digits in FY24 with positive operating leverage supported by cost synergies tied to the Bank of the West acquisition more than offset by an increase in credit losses and lower NIM expansion. TP reduced to C$101.

Canadian Banks: Pivot or divot?

Financials

Report by Veritas Investment Research

Nigel D’Souza believes Canadian banks could face an inflection point later this year when consensus expectations for rate cuts are pushed out to 2024 as the BoC signals a higher-for-longer pause. He forecasts a double-digit decline in adjusted earnings for the sector over the medium term, mainly due to lower risk-adjusted margins. On valuation, Bank of Nova Scotia offers the most attractive risk-reward skew among the Big Six banks. Nigel sees the greatest downside risk for Bank of Montreal and CIBC in a moderate recession on higher credit losses for the former and weaker NII growth for the latter.

Canadian Banks: Credit risk playbook for a recession

Financials

Report by Veritas Investment Research

The coming credit storm - Nigel D'Souza expects provisions for credit losses in the upcoming cycle to match or potentially exceed PCLs during the GFC. Highlights from Nigel’s report include: 1) Household debt service ratio to set a record high. 2) International exposure to skew PCLs higher during a recession. 3) Real estate secured lending portfolios unlikely to drive material credit losses. 4) Wholesale portfolio credit risk likely to be more idiosyncratic than systemic. 5) Of the Big Six banks, Bank of Montreal would experience the highest peak PCL ratio during a recession (1.20% or 6.0x BMO's pre-pandemic level); National Bank the lowest (0.29%).

Canadian Banks: Tax grab

Financials

Report by Veritas Investment Research

New bank and insurance company surtax unjustified - unfair to use pandemic earnings as a benchmark to support additional taxation. It is not a good look to attract foreign investment to the sector or for the sector's performance over the long term, given its importance to retirement portfolios and Canada's economy. Onerous taxation during 'good times' could hurt banks during 'bad times' and change the calculus on bank expectations for ROE through the full cycle. Bank of Montreal remains Nigel D'Souza's only Buy-rated bank of the Big Six.