Bank of Nova Scotia was upgraded and Royal Bank of Canada was hit having a downgrade, following a latest round of earnings from the Canadian banking sector.
Mario Mendonca at TD Securities raised his rating on Scotiabank to buy from hold after its first quarter earnings came in slightly above expectations.
The analyst noted that the bank reported higher energy-related credit losses, but overall, there have been keep surprises away in connection with this.
Mendonca’s upgrade is also based on estimates that suggest Scotiabank is trading in a seven percent discount to its banking peers.
“Historically, the bank’s stronger growth and premium valuation happen to be driven by consistent earnings along with a strong international segment,” he said.
The analyst noted that Scotiabank has produce healthy gains in international loans and incredibly strong fee income growth over the past two quarters.
He also anticipates the financial institution will produce near industry-leading domestic retail earnings growth.
Mendonca hiked his price target around the stock to $66 from $62.
Meanwhile, RBC was cut to carry from buy because it posted what Mendonca considers the “big surprise” in retail banking this quarter.
RBC saw earnings growth of just 0.9 percent, and produced the weakest growth in the sector for the second straight quarter.
Trimming his price target around the stock to $78 from $80, Mendonca noted that he expected RBC would re-assert itself in domestic retail banking this year, particularly when it found loan growth and operating leverage.
“Coming out of the quarter, we’re concerned that RBC continues to lag with respect to margins (rates remaining low impacting deposit margins) and fee growth,” the analyst said.
He added the downgrade also reflects RBC’s higher below investment grade oil and gas exposure, and contact with capital markets earnings, which are likely to be volatile in 2016.
