Some experts reduce ratings and cut projections due to the impending recession
The unknowable future and likely recession have possibly driven Canadian bank stocks to reach the end of their potential upside. As a result, some analysts have reduced their outlooks and downgraded their ratings.
On May 9, the S&P/TSX financials index dropped 1% because of a downgrade by Barclays Bank PLC analyst John Aiken to Royal Bank of Canada, Bank of Nova Scotia, and Toronto-Dominion Bank. After Aiken lowered the bank from "overweight" to "equal weight," shares of TD dropped more than 1% during the trading day and finished at $81.35.
After being reduced from overweight to underweight, RBC's stock likewise dropped more than 1% to $129.43, and shares of Scotiabank dropped just over 2% to $65.88 after being cut from equal weight to underweight. Aiken also downgraded his previously optimistic view for the industry to neutral.
The financial industry is concerned about the future state of the economy, even if some analysts contend that Canadian banks have not yet felt the full impact of the US banking crisis. When Canadian banks report their results at the end of the month, such concerns are unlikely to surface.
“While we do not anticipate that the Canadian banks’ second quarter will demonstrate much earnings weakness, we believe that cracks in the foundation will become evident,” Aiken said. “Further, with an uncertain outlook and a looming recession, we anticipate that there will continue to be pressure on the banks’ valuations and declining confidence in their earnings outlook.”
In addition to support from a more robust comeback in the spring housing market, Aiken continues to anticipate loans to increase across banks. The increase of credit will be hampered by the anticipated recession.
Higher interest rates have been a double-edged sword for banks since they have increased net interest margins, which gives banks the opportunity to make more on interest at the expense of reducing mortgage demand. Over the last few quarters, net interest margin has supported bank profitability.
Aiken anticipates a rise in bank loans as a result of the spring housing market, but this will be constrained by the impending recession. Banks now have the chance to earn more on interest at the price of a decline in mortgage demand thanks to higher interest rates. Over the past few quarters, net interest margin has sustained bank profitability.
Higher interest rates are causing fractures in the foundation of regional banking in the United States, as seen by the March demise of Silicon Valley Bank. This indicates that a burden on bank performance may emerge from rate rises.
The Big Six banks have been underperforming the S&P/TSX composite index, according to Canaccord Genuity Group Inc. analyst Scott Chan, even though Canadian banks are protected from the effects of the U.S. repercussions. The bank group's earnings-per-share outlook has been reduced by Chan's team by 2% owing to greater expenditures and slower loan growth.
Macroeconomic headwinds won't, however, affect all banks in the same way. Chan raised the rating of Canadian Imperial Bank of Commerce from a hold to a buy on the basis of projections for a 17% rate of return, above the 10.4% return he anticipates for the entire bank group.
