Proactive Investors - Canadian banks are set to report accelerating earnings per share (EPS) growth for the fourth quarter underpinned by stable net interest margins, modest loan growth and only slight increases in credit costs, according to analysts at Bank of America (NYSE:BAC).
They project EPS growth of 7% year-over-year for Q4, up from 6% in Q3.
This momentum is seen continuing into 2025, driven by factors such as potential GDP growth nearly doubling to 2.4% year-over-year and 75 basis points of Bank of Canada rate cuts by April 2025, leading to a projected overnight rate of 3%.
They highlighted potential valuation expansion for banks, which are trading at 12x forward price to earnings ratio (P/E) for 2025 compared to the pre-pandemic five-year median of 11x.
Growth may also be unlocked from upcoming federal elections, the analysts wrote.
“We believe it is important for investors to not ignore upside potential to bank stocks from upcoming federal elections that could see a more business-friendly government take control,” they wrote.
“Given how central the banks are to credit flow and the equity markets (constitute 20% plus of the TSX Index), bank stocks could see widening valuation multiples if investor optimism around post-election economic outlook brightens.”
Bank of America’s analysts upgraded Scotiabank (TSX:TSX:BNS) to a ‘Buy’ rating, citing management’s turnaround under CEO Scott Thomson has begun yielding results.
The bank’s sharpened profitability focus and sensitivity to rate cuts position it for an approximately 300 basis point return on equity (ROE) improvement by 2027, supporting expected stock outperformance, analysts wrote.
Royal Bank of Canada (TSX:TSX:RY) and Canadian Imperial Bank of Commerce ( CIBC ) (TSX:NYSE:{{20176|CMTSX:CM) remain ‘Buy’-rated due to their strong execution, disciplined capital management, and improving ROE prospects.
Royal Bank, in particular, is noted for potential gains from HSBC Canada synergies and its emphasis on capital-light revenue streams like wealth management and cash management.