A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
A new report from BofA Securities analyst Ebrahim Poonawala was released early Friday with the title “Canadian Banks: Positioning for more pain,”
“Despite the 30%+ YTD [year-to-date] sell-off in stocks that has pushed valuations to historical lows, we believe investors should not underestimate the potential for additional downside risk… We ran a bottom-up (by business segment) recession analyses for each of the five banks and estimate a 40% EPS hit and a 500bp ROE hit on average in a stress/recession scenario. However, we do not foresee a capital event for the banks nor do we see the dividends at risk … We are incorporating the recession scenario in our PO methodology and reduce our price objectives for the banks by 17% on avg … “
“@SBarlow_ROB BoA: "Canadian Banks - Positioning for more pain: stress EPS = 40% downside" – (research excerpt) Twitter
“ @SBarlow_ROB BoA: "Our recession scenario implies roughly 40% EPS downside [for Canadian bank stocks]" – (chart) Twitter
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BMO economist Doug Porter reported that Thursday’s slide on the TSX was not just bad, but historically bad,
“TSX has just turned in its biggest daily percent decline in more than 40 years of records, stretching back to the late 1970s. And, yes, that includes 1987… The 12.3% plunge on Thursday comes just one day after the index officially hit bear market terrain … Recall that the index was at an all-time high as recently as three short weeks ago to the day.”
“@SBarlow_ROB BMO: Day for the Ages for TSX” – (research excerpt) Twitter
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The slashing of earnings and economic growth forecasts by prominent strategists used to be big news, but, at this point, they’re just past of the daily backdrop. Citi’s (Montreal-raised) U.S. equity strategist Tobias Levkovich was among the latest to reduce expectations (my emphasis),
“We are trimming our 2020 S&P 500 EPS estimate by $5.00 to $159.25 given oil prices, though this forecast is still vulnerable. Recessions typically take earnings down 20%-25%, and the collapse of industries due to COVID-19 (such as tourism, airlines, cruises, casinos, etc.) and policies, including split workforces, will generate consumer-related demand issues as people will not be out and about. We envision profit risk (if a downturn ensues) to as low as $135.00, though this is not our base-case scenario. Applying a multiple of 18x gets us to a 2,430 plausible bottom level.”
As an added anecdote, I was picking up dinner at a local restaurant bar yesterday – the server mentioned that their tips for the previous two days were $17 total when $200 – plus was the average.
“@SBarlow_ROB Levkovich: "trimming our 2020 S&P 500 EPS estimate by $5.00 to $159.25 given oil prices, though this forecast is still vulnerable" – (research excerpt) Twitter
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Corporate debt is my main focus during this bout of market volatility, and I’ll try and update what’s happening daily. The FT has had the best coverage and that is true again this morning,
“We found out this week that Boeing alone would be fully drawing down its $13.8bn delayed-draw term loan. At the same time other companies and foreign entities would be drawing down their revolving loans and cash deposits at major banks.
The “scissors” of these actions snip the liquidity coverage ratios of the banks and, absent the provision of near-condition free central bank money, reduce the ability of the banks to make even necessary advances to customers.”
“An avalanche of destabilised debt and liquidity is coming our way” – Financial Times (paywall)
See Also: “U.S. Fed, Bank of Canada move to support financial system as stocks plunge into full bear-market rout” – Berman, Report on Business
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Diversion: “Hollywood Is Pressing Pause. So Stream These Movies.” – The Ringer (podcast)
Tweet of the Day:
Editor’s note: A previous version report indicated BofA Securities analyst Ebrahim Poonawala projected 40-per-cent average downside in Canadian bank stock prices. This 40-per-cent value applies only to earnings per share , and the analyst has reduced his stock price targets by 17 per cent on average for the sector.
Scott Barlow