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Tap here to see other videos from our team. Try refreshing your browser, or Veritas Investment Research financial services analyst Nigel D Souza, pointed out the recent sell-off among Canada's biggest banks and cautioned that there was more downside risk in the sector. The firm expects provisions for credit losses, or the amount of capital set aside for bad loans, to run higher over 2024 than pre-pandemic levels, assuming central banks don't opt for a dovish pivot in rate hikes.
We expect debt servicing costs to increase to a record high in 2023 and expect provisions for credit losses to increase and possibly peak in 2024 with inflationary pressures, rising rates, and provisions for performing loans under IFRS 9 likely to push forward the recognition of provisions for credit losses D Souza said in an Oct. 4 note to clients.
Over the medium term, Veritas is expecting a decline in adjusted earnings among the Big Six banks, according to D Souza. While D Souza upgraded the Bank of Nova Scotia to a Buy, the firm lowered its price target to $72 from $80. The change comes from softer growth in the bank's Latin American businesses and rising credit losses heading into a recessionary environment. D Souza said that the unexpected shift in leadership that will see Brian Porter retire 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 top pick among the Big Six, though the firm s new valuation rose to $88 per share from $96 due to the expectation of low single-digit earnings declines. TD should come out of the recession relatively uncathed, 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 changed from $129 per share to $124 as Veritas expects moderate downside for the bank heading into a recession. D Souza believes that RBC will be stable with only low single-digit declines in earnings. National Bank of Canada received an upgrade to Reduce and the revised target price went down to $88 per share from $89. D Souza noted that the bank was a low risk, low-reward play, and the firm preferred National Bank for its lower loan-loss provision ceiling in a recession. In the face of a recession, the Bank of Montreal was downgraded to Sell, reducing its target price to $113 per share from $134.