Veritas analyst trims big banks' price targets amid downside risks

Rising debt service costs and the need to set aside more funds for bad loans have one Bay Street analyst slashing his price targets for the Big Six banks.

Veritas Investment Research financial services analyst Nigel D'souza pointed to a recent sharp sell-off among Canada's biggest banks and cautioned that there was further downside risk in the sector. The firm expects provisions for credit losses, or the amount of capital set aside for bad loans, over 2024 to run higher than pre-pandemic levels, assuming central banks don't opt for a dovish pivot in their rate hikes.

“We expect debt servicing costs to increase to a record high in 2023 and expect (provisions for credit losses) to accelerate and potentially peak in 2024 with inflationary pressures, rapidly rising rates, and provisions for performing loans under IFRS 9 likely pulling forward the recognition of (provisions for credit losses),” D'souza said in an Oct. 4 note to clients.

D'souza said over the medium term, Veritas is forecasting a high single-digit decline in adjusted earnings among the Big Six banks.

While D'souza upgraded the Bank of Nova Scotia to a “Buy,” the firm lowered its price target to $72 from $80. The change largely stems from softer growth in the bank's Latin American businesses and rising credit losses heading into a recessionary environment. D'souza noted that the unexpected shift in leadership that will see Brian Porter retiring in January raises some uncertainty, but the current share price would give investors an “attractive risk-reward skew.”

Toronto-dominion Bank was maintained as a “Buy” and stands as Veritas's top pick among the Big Six, though the expectation of low single-digit earnings declines brought the firm's new valuation to $88 per share from $96. TD should come out of the recession relatively unscathed as TD'S Us$13.4-billion acquisition of Tennessee-based regional bank First Horizon Corp. is expected to close early next year, bringing some earnings upside.

The Royal Bank of Canada's target price was revised from $129 per share to $124 as Veritas expects moderate downside for the bank heading into a recession. That said, D'souza expects RBC to remain stable with only low single-digit declines in earnings.

National Bank of Canada received an upgrade to “Reduce” and the revised target price edged down to $88 per share from $89. D'souza noted that the firm preferred National Bank for its lower loan-loss provision ceiling in a recession, describing the bank as a “low-risk, low-reward play.”

Veritas downgraded the Bank of Montreal to “Sell,” knocking its target price to $113 per share from $134 as it considers the bank to be more exposed to credit risks in the face of a recession with a loan portfolio heavily weighted toward commercial loans.

The Canadian Imperial Bank of Commerce also received a downgrade to “Sell” and its target price was taken down to $55 per share from $72. D'souza noted he sees substantial downside for CIBC heading into a recession as higher provisions for credit losses would weigh on earnings.

After enjoying outsized earnings and record stockpiles of excess capital during the pandemic, the banks have been treading on shakier ground this year as rising rates hampered borrowing demand and concerns about a potential recession rise. Over the course of the year, bank shares are all in the red: Scotiabank has slipped 27 per cent to $66.26; TD stock is down 12 per cent to $87.17; RBC shares have fallen nearly seven per cent to $127.37; National Bank shares are down 10 per cent to $89.37; BMO is off 12 per cent to $123.78; and CIBC'S stock fell 18 per cent to $61.07.