Noah Zivitz

Managing Editor, BNN Bloomberg

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A veteran Canadian banks analyst has raised his price targets on the Big Five as he foresees "palpable" relief coming in the form of rate hikes from central banks.

Jonathan Aiken at Barclays Capital raised his targets by an average of 10 per cent, with the most significant increase going to Bank of Montreal. Aiken is now calling for shares in that lender to hit $165, up almost 18 per cent from his previous target of $140. He also upgraded the stock to overweight from equal weight, as a result of the bank's broader exposure to the U.S. thanks to its pending takeover of Bank of the West.

"Despite the domestic operations being negatively impacted in the immediate term from the various government approaches attempting to contain Omicron variant, the outlook for the banks in 2022 has become decidedly more positive, particularly with expectations that interest rate hikes are looming," Aiken told clients in a report published Wednesday.

As of Wednesday morning, market data indicated investors have priced in at least four hikes from the Bank of Canada and U.S. Federal Reserve this year. Aiken, however, noted he's taking a "conservative" view in assuming only two quarter-point rate hikes in each of the next three years.

"For the Canadian contingent (of banks), which has been facing net interest margin compression, the relief will be palpable. Even if the earnings impact is not immediate, we anticipate that, at a minimum, valuations will benefit when the rate hikes start," he wrote.

Aiken pinpointed Toronto-Dominion Bank as being best positioned to benefit from higher rates. He raised his target on that bank's shares to $111 from $99.

Canadian Imperial Bank of Commerce was handed the most meager price-target hike as Aiken now sees its shares hitting $169, compared to his previous call for $162. By consequence, he downgraded the stock to equal weight from overweight.

"CIBC’s turnaround in its domestic retail banking franchise has been remarkable but we believe that this story has entered the later innings. Further, while PrivateBank has performed well and gives [CIBC] exposure to the important U.S. commercial (and wealth) segment, it still remains a relatively smaller contributor to its total earnings," he said.

While Aiken raised his targets on each of the Big Five, he didn't touch his view on Canada's sixth-largest lender. He continues to see National Bank's shares at $101 (compared to Tuesday's closing value of $102.34 on the Toronto Stock Exchange), and maintained his underweight rating on the stock.

"National has done an exceptional job increasing its earnings through the pandemic. Unfortunately, its outlook faces some headwinds, at least on a relative basis," he wrote, while noting the bank's high exposure to capital markets and its minimal U.S.-based earnings. 

Despite the potential payoff for banks when central banks start raising their benchmark interest rates, Aiken reminded his client that the sector still faces political risk at home.

“A near-term headline risk (outside of the ongoing impact of the pandemic) is the government’s potential tax on the financials, which is expected to be announced in conjunction with the next budget. The market has shrugged off the impact, likely because it can be recouped through fees.”