Canadian Banks' Q4 Better Than Expected - TD Newcrest

Includes: CM, LRCDF, RY
by: FP Trading Desk

Fourth quarter bank earnings weren't pretty, but long-term fundamentals remain far more stable than what is currently priced into the market, says TD Newcrest analyst Jason Bilodeau.

Mr. Bilodeau said in a note to clients:

Most operating results were consistent with pretty low expectations while on balance the 'surprise' write-downs were better than perhaps feared. The stocks are trading below what we believe is supported by long-term fundamentals. We expect fear/concerns to continue to dominate amid weak/volatile equity markets, but on reduced Target Prices we continue to see attractive upside on a 12-month view.

The analyst said the risk of further write downs is reduced, thanks to new accounting guidelines that have allowed banks to reclassify assets and shore up their capital positions.

In particular, the analyst finds Canadian Imperial Bank of Commerce (NYSE:CM) attractive, upgrading the stock to Action List "Buy." His CIBC price target is unchanged at C$67.

He said:

The bank turned in a decent operating quarter (relative to reduced expectations). Coming out of the quarter the bank appears to be well capitalized and we believe that the worst (although not all) of the write-downs are behind us.

Mr. Bilodeau cut his Royal Bank of Canada (NYSE:RY) price target from C$55 to C$40 and maintained his "hold" rating on the stock, saying the bank does not have the premium business mix to justify a premium multiple against peers. He also noted that Royal Bank has the thinnest regulatory capital ratio in the industry at 9.1%.

Laurentian Bank of Canada's (OTCPK:LRCDF) price target was also cut from C$47 to C$37, on concerns the bank's return on equity, expected to run between 10 to 12% has "topped out." Mr. Bilodeau has a "hold" recommendation on Laurentian.