Earnings are more important than dividend payouts: Veritas analyst on Canadian banks
Long-time Bay Street banking analyst Nigel D’Souza doesn’t think investors are poised to reward Canada's Big Six banks for their upcoming financial results that may see a boost from pandemic-related factors.
D’Souza, the financial services investment analyst at Veritas Investment Research, said in a broadcast interview Wednesday that investors would likely look through the pandemic-related noise towards a more normalized operating environment, which could limit the upside for shares of the Big Six banks.
“We think the market is no longer going to reward banks that do well on earnings based on temporary pandemic-related factors such as record or elevated capital market revenues and significant credit loss reversals,” he said.
Earlier this week, D’Souza downgraded his recommendations on shares of Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank. D’Souza has consistently been one of the most bearish analysts on the Canadian banking sector, often applying the equivalent of a “sell” rating on the banks. He now rates RBC “sector outperform”, and has a “sector underperform” call on BMO, CIBC and National.
D’Souza said Canadian investors should look south of the border to the muted market reaction from a slate of major U.S. banks earnings for signs of what to expect when the Canadian banks report.
“If you look at U.S. bank results, which reported recently, you can see that their earnings were fairly strong on those temporary factors, like higher capital markets revenue and [provisions for credit losses] reversals, but their core banking business didn’t do as well and you saw weaker loan growth,” he said.
“And the market didn’t respond positively to the results despite the top line number being good.”
While D’Souza is taking a dimmer view of most of the major Canadian banks, he said Toronto-Dominion Bank is poised to benefit from the more normalized operating environment, due to its outsized exposure to personal and commercial lending, rather than the volatile capital markets.
“All the factors and trends that hurt TD during the pandemic are going to be what provide a tailwind for TD coming out of the pandemic,” he said.
“When we have net interest margins beginning to expand again as central banks normalize interest rates, when we have loan growth returning to normal as excess cash balances are depleted and when we have capital markets revenue normalize, all of those factors benefit a bank like TD Bank.”
D’Souza has a “buy” rating on shares of TD and a price target of $93.00 per share.