Price targets for big banks lowered by CIBC amid uncertainty

Rising interest rates are generally expected to work in the favour of Canada's big banks, but one team of analysts is taking a cautious stance toward their share prices given the wider economic backdrop.

Analysts at Canadian Imperial Bank of Commerce this week came out with acrossthe-board target price cuts for the big Canadian banks, arguing that the macroeconomic picture was becoming less certain, and could drag on results in 2023.

CIBC analyst Paul Holden reduced price targets for seven banks by five per cent on average, cutting the Bank of Nova Scotia (from $94 to $86), the Bank of Montreal (from $150 to $142), the Royal Bank of Canada (from $149 to $146), Toronto-Dominion Bank (from $103 to $100), National Bank of Canada ($102 to $100), Canadian Western Bank (from $38 to $34) and Laurentian Bank (from $44 to $41). The CIBC analysts do not maintain a rating or price target on CIBC.

Holden and his team reduced forward-looking adjusted earnings per share by one per cent for 2022 and by four per cent for 2023 in anticipation of slowing loan growth and higher credit losses.

While National Bank and RBC had their target prices trimmed, the team gave them an “outperformer” rating due to lower valuation gaps among their peers, implying less risk and a more defensive position in a recessionary environment.

In a note to clients, Holden argued that banks were currently priced in-line with a five-year average price to book value multiple of 1.7x, or about the same rate expected in a normal economic scenario and not accounting for an economic recession. “If the outlook for economic conditions continues to be challenged, then there is downside risk to valuations,” Holden wrote.

While Holden expects strong results in the banks' upcoming second-quarter earnings reports to be driven by loan growth of more than two per cent quarter-over-quarter, he noted that the “headline results might not matter all that much” as an economic slowdown is increasingly being priced into the market.

The CIBC analysts pointed to slowdowns in the residential mortgage market and business loans that are expected to affect results after the second quarter.