Jefferies Financial Group has raised its price targets across the Canadian banking sector, citing limited fallout from global trade tensions and improved economic conditions in both Canada and the U.S. ahead of third-quarter earnings. However, the firm warns that with bank valuations nearing “priced for perfection” levels, any earnings disappointment could lead to sharp declines in share prices.
The upward revisions are largely based on expanded valuation multiples rather than stronger business fundamentals. Analyst John Aiken notes in the firm’s Q3 preview that while he expects “modest” earnings growth, this is being driven more by reduced provisions for potential credit losses than by revenue expansion.
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Royal Bank of Canada saw its target price nudged higher by roughly 4.5%, while Toronto-Dominion Bank (TSE: TD) received a nearly 14% boost. Despite these revisions, Jefferies maintained its existing ratings: “Buy” on RBC (TSE: RY), TD (TSE: TD), and Equitable Bank (TSE: EQB), and “Hold” on the other banks in its coverage.
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Aiken remarked that the anticipated economic fallout from trade disputes has so far failed to materialize: “Apparently, the end is not nigh,” he said, adding that both Canada and the U.S. have weathered tariff threats better than expected.
This improved outlook likely led banks to release some of the credit cushions they had previously built up, especially for performing loans. Jefferies expects a noticeable drop in provisions for these loans in Q3, though some of the benefit may be offset by a slight increase in provisions for impaired loans, hinting at early signs of credit stress.
Still, revenue growth is expected to remain weak. The firm highlights sluggish consumer lending, slowing commercial loan activity, and an expected dip in capital markets revenue during the typically quieter summer period. Until business and consumer sentiment improves, overall loan growth may stay muted.
Share prices have generally drifted higher throughout the quarter, leaving banks with limited room for error, Jefferies warns. “Although we’re not predicting significant earnings disruptions, the sector’s valuation has climbed into more vulnerable territory,” Aiken wrote. “Any earnings miss could trigger a sharp correction in multiples, while even modest beats may not offer much upside in the near term.”
Jefferies offered the following insights on individual banks:
- Royal Bank of Canada (RBC): The acquisition of HSBC Canada enhances its leadership in domestic retail and commercial banking.
- National Bank: Remains focused on growth within Canada following its acquisition of Canadian Western Bank.
- TD Bank: Recovering from past anti-money laundering issues, and its excess capital provides flexibility and downside protection in the event of a downturn.
- Bank of Montreal (BMO): Its U.S. presence has grown through the Bank of the West acquisition, but investors are still awaiting proof of promised efficiencies and growth.
- Equitable Bank: While it shows strong profitability and expansion, it continues to trade at the lowest valuation multiple in the group.
In terms of shareholder returns, dividends are expected to remain flat for most of the big six banks, with the exception of Equitable Bank, where Jefferies anticipates a 4% increase. Share buybacks continue at a modest pace across the sector.
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