Canadian Banks: Earnings Estimates Increased - Macquarie Research

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Includes: BMO, BNS, CM, RY, TD
by: FP Trading Desk

With less than one week to go before Bank of Montreal (NYSE:BMO) kicks off third quarter bank earnings results, analysts are busy crunching their numbers and making last minute predictions. While some remain bearish on the most recent quarter ended July 31, others are starting to see the light at the end of the tunnel.

Sumit Malhotra of Macquarie Research said in a note to clients:

While we expect that credit challenges will persist for the banks into 2010, the group has demonstrated impressive resiliency from both a revenue and capital perspective.

Owing to the increase in loan loss provisions and the 4% rise in the diluted average share count, Mr. Malhotra said diluted cash earnings per share will decline by 13% year-over-year for the sector.

That said, the analyst increased his earnings estimates by 2% in 2009 and 10% in 2010, to reflect a positive trend in bank revenues, which have proven a successful offset to loan loss provisions that have moderated, but remain elevated.

Specifically, he expects revenue for the group will climb 9% year-over-year in the third quarter on improvement in net interest margin from loan repricing, declining wholesale funding costs, and lessened liquidity. Continued strength in market-sensitive revenue including a better contribution from wealth management will also contribute to the positive top line growth.

He said:

In a quarter in which we see revenue trends remaining strong while the deterioration in credit quality metrics is more moderate (our estimates are for the most part ahead of consensus), we look for Royal Bank (NYSE:RY), TD, and National Bank to produce especially solid results.

Mr. Malhotra increased target prices for all eight banks he covers and also upgraded his rating on Toronto Dominion Bank and Canadian Western Bank from UNDERPERFORM to NEUTRAL. Overall, five of eight banks are now rated NEUTRAL.

"On aggregate the Canadian banks do seem expensively priced," he wrote.

That said, with a large part of the stock market rally off of the winter lows based on the “normalization trade”, we can see how investors looking further out to when credit costs begin to decline would find the potential earnings power and capital generation of the Canadian banking sector appealing.