Seeing signs of recovery in the Canadian banking sector, a BMO analyst offers his top stock picks ahead of earnings season

November 14, 2023

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO analyst Sohrab Movahedi previewed earnings reports for the major banks, highlighting short-term problems but predicting upside for stock prices once more transparency on the economy arises,
“Across the ‘Big 5′ (excl. BMO) in Q4/23, cash earnings are expected to be down approximately 8 per cent year-over-year (ranging from down 20 per cent at BNS to up 4 per cent at NA), largely reflecting higher year-over-year credit provisions of 38 basis points/$3.2-billion (up from 26bps/$2B) and negative operating leverage (softer revenue coupled with sticky expenses). We are forecasting lower year-over-yearearnings at all operating business segments (led by U.S & Int’l Banking). The Canadian bank index’s forward P/E of 9.2 times relative to our 2024E estimates is now comparable to the averages seen during the pandemic and GFC [great financial crisis]. Bank valuations may remain depressed in the near term, reflecting economic uncertainties; however, we expect a re-rating once investors have greater clarity on the macro and earnings growth beyond FY2024. Our Outperform rated names remain CM, NA, EQB, and CWB”.
BofA Securities’ monthly survey of global portfolio managers uncovered a lot of faith that interest rates are close to a mid-term peak,
“Fund Manager Survey (FMS) investors remain cautious on macro but turn bullish on interest rates; investor playbook for 2024 is soft landing, lower rates, weaker US$, large cap tech and pharma bull continues, avoid China and leverage; investors cut cash from 5.3 per cent to 4.7 per cent (2-year low), move to biggest bond overweight since Mar’09 … investors expect weaker global growth (net -57 per cent) but 74-per-cent predict soft or no landing at all (21 per cent say hard landing); ‘short leverage’ theme … CIOs tell CEOs to improve balance sheet (52 per cent) rather than increase capex (21 per cent) or stock buybacks (18 per cent)… Nov FMS shows long positions in/rotation to bonds, tech (2-year high), REITs, US & Japan stocks (5½-year high) … most crowded trades: long Big Tech 38 per cent, short China stocks 22 per cent, long T-bills 11 per cent.”
Scotiabank analyst Robert Hope outlined the financial results and top picks in the yield-heavy energy infrastructure sector,
“Overall, Q3 results were ahead of our expectations, and post-results, share price reactions were muted aside from BIP [Brookfield Infrastructure Partners] and TWM [Tidewater Midstream and Infrastructure Ltd.] . Following the quarter, we saw consensus estimates move up the most for PPL [ Pembina Pipeline], ACO [Atco], and KEY [Keyera], and down the most for TWM and AQN [Algonquin]. So far in Q4, we have seen the Canadian 10-year bond yield decrease by ~20 bps and the Canadian dollar continues to weaken, which are largely tailwinds for our coverage universe. Specifically, we have seen the utilities outperform quarter-to-date and the pipeline / midstream groups are also benefiting. On the other hand, sentiment on renewable power names continues to be tepid. Our overall favourite names are ALA [Altagas], KEY, and TRP [TC Energy Corp].”
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