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The state of Canada's banks

BNN rounds up some of the analyst remarks after 5 of the country’s 6 largest banks reported their earnings this week.

Royal Bank of Canada

John Aiken, Barclays Capital: “After a robust Q1 to start off 2011, we believe RY's failed to meet heightened expectations, as core earnings in the second quarter fell 19% sequentially. The market shrugged off the 8% increase in the dividend, driving some pretty significant intra-day underperformance against its peers. However, with much of the disappointment related to revenue volatility in its capital markets platform and the history of RY recovering lost valuation after missing expectations, we would argue that the sell-off is largely overdone, at least on a relative basis. We note that our forecast for 2012 is essentially unchanged.”

Darko Mihelic, Cormark Securities Inc.: “This is not to say that RY's results are not an improvement over last year or that a 16.7% ROE is bad per se (something all of their written materials readily point out) but consistently volatile results like this are simply not good enough to sustain a premium to peers.”

John Reucassel, BMO Capital Markets: “Overall, results are likely to disappoint relative to market expectations but the dividend increase and solid results in domestic retail banking may soothe some investor concerns. RY remains rated Market Perform.”

Brian Klock, Keefe, Bruyette & Woods Inc.: "We would expect shares to be weak on the decline in core profitability driven by a retreat of fee income driven by the weaker FICC trading results. Credit continues to improve and the company was able to generate solid Canadian loan growth (+5.5% linked qrtr annualized) which was largely offset by declines in the U.S. and Caribbean loan books (which were negatively impacted by the F/X translation adjustment)."

Canadian Imperial Bank of Commerce

Darko Mihelic, Cormark Securities Inc.: “Canadian Imperial Bank of Commerce (CIBC) will benefit from recent acquisitions, low/stable loan losses as the economy recovers and conservative capital management. As such, we look for EPS growth of 16% in 2011. We believe the stock at 9.9x 2012 EPS estimates represents good value and perceptions regarding this bank’s growth and risk versus reward trade-off may change for the better over time.”

Mario Mendonca, Canaccord Genuity: “With the credit recovery theme essentially having run its course in Canada, we expect CM's earnings growth to start to lag the group in the near term...We lowered our EPS estimates and reduced our target price to $90.00 from $93.00. Our target price is based on the stock trading at 11.8x 2012E EPS, a 9% discount to the group average target multiple of 12.9x. At a 7% discount to the group P/E multiple (on our estimates) we do not view CM's valuation as attractive. We continue to rate CM HOLD.”

Brian Klock, Keefe, Bruyette & Woods Inc.: "Core earnings were pulled down by a disappointing 14-bp drop in the NIM [Net Interest Margin], which offset slightly higher than expected loan balances. The competitive environment has increasingly intensified in Canada, pressuring loan yields and margins. A measured improvement in credit quality only partially mitigated the impact on the bottom line."

National Bank

Darko Mihelic, Cormark Securities Inc.: "National Bank (NA) will benefit from a recovering economy in Quebec that thus far has outpaced the rest of Canada. We view the bank as relatively challenged with respect to revenue growth despite its recent initiatives. We believe NA’s EPS growth will lag peers but its relative valuation suggests inline stock price performance."

Mario Mendonca, Canaccord Genuity: "While we remain favourably predisposed to the bank, we did downgrade NA early this week (and upgraded BNS to a BUY) entirely on the view that the positive themes were priced into the stock. With the higher dividend, the stock trades at a dividend yield of 3.5%, slightly below the group average. Over the long-term the bank has traded at 107% of the group dividend yield. We rate NA HOLD."

Toronto Dominion

Darko Mihelic, Cormark Securities Inc.: "TD has excellent Canadian and US retail bank franchises. Its North American retail businesses are performing exceptionally well with Y/Y earnings growth of 17% in Q2/11. US bank reform impact looms; however, thus far, TD has earned well through the initial negative impact of regulation E. At 11.5x 2012 EPS, we view TD as under valued given its growth profile and stable retail business mix."

Mario Mendonca, Canaccord Genuity: "We continue to rate TD BUY. Our positive outlook on the stock reflects the bank's strong retail franchise (and capacity to take market share and keep costs under control as consumer loan growth slows), lower reliance on trading revenue, capacity to raise dividends and the significant earnings upside associated with improving credit conditions and higher interest rates in the U.S."

Bank of Montreal

Kevin R. Choquette, Scotia Capital: "We have increased our 2011E EPS to $5.40 from $5.30 due to solid operating results and lower LLPs. Our 2012E EPS is unchanged at $5.90. We have increased slightly our one-year share price target to $70 from $68. Maintain 2-Sector Perform rating as relative valuation remains high versus relative profitability."

John Aiken, Barclays Capital: "Although credit provided a valuable lift to the bottom line, we believe the magnitude of this quarter's improvement will be difficult to replicate and is likely to retrace somewhat in coming quarters."

Brian Klock, Keefe, Bruyette & Woods Inc.: "We view the underlying core fundamentals in the quarter to be solid. Looking ahead, the key focus for BMO remains the integration of the M&I deal, realization of the now increased targeted cost saves, and continuing to maintain positive trends in asset quality, while fighting headwinds in capital markets and its spread businesses." CTV Two CTV News CTV News Channel BNN - Business News Network CP24