Canadian banking stocks have generally been on an uptrend since the summer months, raising the question of how much momentum is left for 2011. TD Newcrest is out with a new review of the sector Monday that tries to answer that question, and while it's scaled back its expectations somewhat, given the recovery in the second half of the year, forecast returns still aren't looking too shabby: 15 per cent to 20 per cent for 2011, including dividends.
Analyst Jason Bilodeau expects moderate earnings growth of roughly 12 per cent over the coming year, with domestic loan growth slowing, margins holding fairly steady and some incremental credit and operating leverage. He thinks valuations are pretty reasonable at current levels.
"We expect investors to begin to take a longer-term view of the industry again and focus on who can deploy capital effectively. In our view, some can and some cannot," Mr. Bilodeau wrote in a report.
Using that thesis as his guide, his favourite among the big names is Bank of Nova Scotia. It's exposed nicely to faster growth markets and opportunities, and his 12-month target on the stock of $64 implies a return of about 17 per cent. Other favourities are Royal Bank of Canada, with a target of $61 (currently trading near $52), and CIBC, with a target of $86 (about a $12 increase from current levels). He sees good returns from RBC following a weak year and a disappointing series of quarterly results, and he feels there's potential upside to CIBC's earnings outlook.
He rates Bank of Montreal, National Bank, Canadian Western Bank and Laurential Bank of Canada all as "holds."