Paul Bagnell

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A Bay Street analyst cut his ratings and targets on two Canadian banks Monday, and investors reacted by selling shares of each.

The downgrades came from Gabriel Dechaine, a veteran bank analyst with National Bank of Canada, and were applied to shares of Toronto-Dominion Bank and Bank of Montreal.

Dechaine cut his rating on each bank to “sector perform” from “outperform” – similar to moving to a hold rating from a buy rating.

His price target on TD Bank was cut to $100 from $110 and his price target on BMO was cut to $151 from $163.

Both banks have announced huge acquisitions in the United States recently, and the regulatory path ahead for approval of those transactions was one reason for his reduced ratings and target prices.

On Feb. 28, TD Bank said it would acquire First Horizon Corp. for US$13.4 billion. In late December, BMO said it would pay US$16.3 billion for Bank of The West.

In each case, Dechaine said he believes final approval from regulators will not come until the end of the second quarter of 2023. That’s one quarter later than each bank is forecasting. If Dechaine is correct, it will mean the big earnings per share boost each bank will get from its respective acquisition will be in force for one less quarter of the 2023 calendar year than markets may now be assuming.

He also said TD Bank will suffer from market pressure to reduce or eliminate overdraft fees on accounts in its big U.S. retail banking business. Some of its competitors have already done so.

Dechaine also added that BMO has racked up an unusually high level of profit from securities gains in recent quarters, a trend he does not see continuing.

Dechaine said he sees each bank suffering from “decelerating earnings momentum” and is therefore cutting the price-earnings multiples he uses to calculate price targets.  The TD multiple goes down to 12 times expected earnings from 12.5 and the BMO multiple goes down to 11 times from 11.5.