The impacts of the global economic and geopolitical situation continue to reverberate across the Canadian financial system
Amid geopolitical turmoil and macroeconomic volatility, Canada’s largest banks might suffer significant declines in their shares in the near future, according to Paul Holden of CIBC Capital Markets.
The shining exceptions to this prognosis are the Royal Bank of Canada and National Bank of Canada. In a new analysis, Holden raised his recommendations for the banks from sector perform (equivalent to hold) to outperform (equivalent to buy), owing to their strong capital, diversified earnings, and lower relative credit risk.
On the other hand, Bank of Nova Scotia, Toronto-Dominion Bank, and Canadian Western Bank were all downgraded from outperform to neutral.
In particular, Canadian Western Bank is likely to experience the harshest price-target decline, from $45 to $38 (approximately 16%). RBC is poised to see the smallest reduction, from $151 to $149 (around 1%), Holden said.
Read more: Budget 2022: Big banks and insurers take a hit
“Our prior investment thesis was primarily premised on strong loan growth and higher interest rates. In other words, we had taken a pro-cyclical stance,” Holden wrote in a client note. “That view is now shifting as we look to commentary from the Federal Reserve, warning signs in rate markets and US bank stocks.”
“Canadian bank stocks are not being priced for the same economic risks that have already been incorporated into the bond market and US bank stocks,” he added. “We are not calling for a 2023 recession as our base case, but we cannot simply dismiss that possibility as inconsequential. Our analysis shows there could be (roughly) a 30% downside should a recession scenario transpire.”
