Canadian banks are expected to face significant volatility in the upcoming 2Q 2024 earnings season, according to a recent analyst note from Bank of America.
The report highlights year-to-date underperformance against US and EU peers, driven by macroeconomic concerns and less appealing valuations.
Canadian banks have seen a rough start to the year, with stocks lagging behind international counterparts. The second quarter of 2024 is expected to show a 7% year-over-year decline in earnings per share (EPS), slightly better than the 9% drop in the first quarter.
According to Bank of America’s analysis, stocks are trading at 10 times 2025 earnings, below the pre-pandemic average of 11 times, and 1.3 times book value with a forecasted return on equity of 12.8% for FY25.
The US investment bank noted that investor sentiment remains cautious due to uncertainties around higher interest rates and their impact on consumers, which has resulted in muted performance among Canadian banks compared to their US and EU counterparts.
However, the forecasted earnings outlook is improving, with potential benefits from stabilizing credit costs and strong capital allocation strategies.
A closer look at the Big 5 banks:
- Toronto-Dominion Bank (TSX:TD) (TD): Investors are closely watching TD as it kicks off 2Q earnings on May 23. The bank is dealing with a US anti-money laundering (AML) issue, which could impact EPS by 4% to 5% for FY25/26. Despite this, the stock's valuation appears to account for these risks, and improved clarity on the AML issue could boost its performance.
- Royal Bank of Canada (TSX:RY) (RBC): RBC is expected to continue outperforming due to strong 2Q results and the positive impact of its HSBC Canada acquisition. The acquisition has led to an average EPS revision of plus 3% for FY25/26, with investors looking for more details on the realization of deal synergies. RBC remains a 'Buy'-rated stock.
- Bank of Montreal (CSE:BMO) (BMO): Following disappointing 1Q 2024 results, BMO is anticipated to show improved confidence in its US operations. The bank’s performance in the second quarter will be crucial in reversing its current negative outlook.
- Canadian Imperial Bank of Commerce (CIBC) (TSX:CM) (CIBC): CIBC, rated 'Neutral,' is expected to defend its year-to-date outperformance through steady execution. The upcoming report will be the first under the new CFO, which will be closely monitored by investors.
- Bank of Nova Scotia (TSX:BNS) (BNS): Despite recent underperformance due to delayed margin benefits from rate cuts, BNS’s current valuation could provide downside protection. The bank is rated 'Neutral' with a focus on maintaining its position through the earnings season.