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Noah Zivitz

Managing Editor, BNN Bloomberg

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Toronto-Dominion Bank's recent outperformance prompted an analyst to downgrade its shares on Tuesday.

Lemar Persaud at Cormark Securities lowered his recommendation on TD to market perform (the equivalent of a hold) from buy, and maintained his price target at $111.00 per share.

Persaud chalked up his downgrade to a simple matter of valuation after TD outpaced its peers since the start of the fourth quarter last year. 

Indeed, TD's shares jumped 24.4 per cent from Oct. 1 to Feb. 18. Over the same period, the S&P/TSX Composite Index was up 4.3 per cent, and the TSX banks index (which includes the Big Six as well as Canadian Western Bank, Laurentian Bank of Canada, Home Capital Group Inc., and Equitable Group Inc.) rose 15.8 per cent. On a total return basis, TD shares were up 26.7 per cent. 

Persaud estimated that TD's Common Equity Tier 1 capital ratio is sitting well above its peers at 15.2 per cent, compared to the Big Six average of 13.5 per cent. However, he said he hasn't assigned full value to TD's potential war chest due to what he said is "a limited set of potential assets in the U.S. available to trade hands." 

"TD is now the most expensive bank in our coverage universe at 12.2x our 2023 [estimated earnings] and while we like the bank’s heavy weighting toward retail earnings, leading credit card market share, overall significant contribution from the U.S. and industry leading leverage to rising rates, we have a hard time recommending it at a 2x premium to BMO," Persaud wrote in his report to clients. 

And on that front, Persaud upgraded BMO to buy on Tuesday, even as he trimmed his price target to $164.00 per share from $166.00. He cited the bank's US$16.3-billion acquisition of Bank of the West, as well as expense management and his expectation for an acceleration in commercial loan growth as reasons for his bullish recommendation.

Looking ahead to earnings season, which starts on Thursday with Royal Bank of Canada, Persaud is estimating average year-over-year per-share profit growth of eight per cent. On a pre-tax, pre-provision basis, however, he told clients he's expecting average growth of 2.2 per cent among the Big Six.