Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities bank analyst Ebrahim Poonawala provided some skeptical notes on Canadian banks,
“Our recent CEO/CFO meetings highlighted the potential for stabilizing EPS outlook even as credit quality remains somewhat tenuous. Our forecast for the big five banks implies PCLs (credit costs) to average 37bp/32bp for 2H24/FY25 vs. 34bp reported for 1H24. We see downside risk to our EPS forecast from PCLs staying at an elevated level, for longer than we expect. Capital positioning (and 5%+ divi. yields) a positive story … We continue to see US large-cap banks (GSIBs) offering a better risk/reward relative to their Canadian peers. While relative P/E valuation looks discounted (9.4x CAD vs. 10.6x US), we see higher interest rates as posing a structural headwind to the growth outlook for the Canadian banks. On the other hand, the competitive positioning of the largest US banks has arguably improved relative to pre-pandemic years, which should allow them to better capitalize on potential growth opportunities … FY24/25e consensus EPS revisions +1.7%/-0.1% YTD on average with Royal outperforming (FY25 +3.3% vs. stock +5.6%); BMO underperforming (-11.7% vs. -13.4%). Big five banks trading at 9.4x FY25e EPS vs. 10.9x 5yr pre-pandemic median … We reiterate our Buy-ratings on Royal Bank of Canada-RY (superior EPS/ROE defensibility) and BMO Financial-BMO (potential to re-rate on stabilizing EPS outlook, US growth opportunity)”
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RBC strategist Eric Lascelles is not concerned about recent weakness in the copper price,
“A fair part of the decline is the result of softer Chinese demand given the country’s depressed housing market. Reflecting this, Chinese copper inventories are now quite high. However, we are not too worked up about copper’s recent weakness. First, prices are still quite high and well above year-ago levels. Second, China normally has a copper inventory spike in the first half of the year (though this one has been bigger and lasted longer than the norm). Third, copper inventory levels for the entire world are described as “dangerously low”. So Chinese weakness would appear to be offset by ex-China strength”
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BMO senior economist Sal Guatieri focused on the negative effects of sticky inflation pressure on lower-income households,
“Cost of Just Living Still Rising Sharply. Sticky inflation made an unwelcome return to Canada in May. And that’s especially bad news for lower-income households that spend a proportionately larger share of their budget on necessities such as shelter and food than wealthier families. To wit, both grocery bills and rents have risen faster than general prices since the start of the pandemic, by an annualized 5.2% and 4.7%, respectively, versus 3.9%. While the former has simmered down to a 1.5% rate in the past year from earlier double-digit spikes, rents have accelerated 8.9%, the most in over four decades. In a cruel twist of fate, StatCan also reported that Edmonton’s rents shot up 15% y/y”
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Diversion: “What We Got Wrong About Depression and its Treatment” – Marginal Revolution