Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities bank analyst Ebrahim Poonawala continues to slash his earnings forecasts for Canadian banks ahead of earnings season while asking pertinent questions about valuation for the next 18 months,
“We are reducing our ‘20/’21 EPS estimates by 24%/40% to reflect higher credit costs (PCLs), zero bound interest rates and slower growth … The big five banks are trading at an average P/Book multiple of 1.2x vs. 1.5x during Jan/Feb or prior to the COVID-19 driven market sell-off. This begs the question, what should investors pay for a group where we project ROEs to decline to 9-10% on average during 2H20/2021 (vs. 15% in ‘19) weighed down by elevated credit costs. While there is limited visibility around near term earnings outlook, once we are past peak credit costs, ROEs are likely to remain pressured given the outlook for low interest rates, slower economic growth, possibility for higher capital requirements and the likelihood that incremental growth will come from the lower ROE, US market (organic/M&A). While it is too soon to make definitive conclusions, these factors temper our outlook on the group.’
The analysts’ focus on profitability, ROE, is reasonably novel and it’s a good thing for investors to track as quarterly earnings are announced.
“@SBarlow_ROB BoA skeptical on the growth prospects for Canadian banks’ – (research excerpt) Twitter
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Also from BofA, economist Michelle Meyer sees some light at the end of the economic tunnel for the U.S. economy,
“Daily data show meaningful improvement in spending into May, driven by the lower income population. Total card spending is now running at a pace of -10% yoy [year-over-year] over the 5-day period of May 3- May 7, a big shift from the low of -36% yoy during the last 5 days of March. Focusing on retail sales ex-autos, spending is now actually increasing, running at a 1% yoy rate over the same 5-day period.
There appear to be two critical reasons for the improvement in consumer spending: stimulus payments and phased reopening of the economy. Stimulus payments started to filter in on April 15th through direct deposits which was followed by physical checks. In addition, an increasing number of unemployed have successfully filled jobless claims”
“@SBarlow_ROB BoA: "daily data show meaningful improvement in [U.S.] spending into May"’ – (research excerpt) Twitter
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BMO economist Robert Kavcic sees the slide in U.S. equities this week as a reality check for equity investors,
“With economies set to gradually reopen, the reality might be setting in that there will indeed be longer-term consequences to the shutdowns (Fed Chair Powell highlighted as much today). Notably, the concern about liquidity problems becoming solvency problems, which was largely what wage subsidies and commercial rent support were meant to address from the outset. At any rate, the S&P 500 has run into clear resistance, and slumped again on Wednesday, now falling further below the 200-day average again. Banks have lagged in recent days’
“@SBarlow_ROB BMO: Reality check for equities” – (research excerpt) Twitter
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Newsletter: “Why value investing has never been more tempting” – Globe Investor
Diversion: “A look at big bands who have played small rooms across Canada” – Journal of Musical Things
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Scott Barlow