• FY2022 (ended October 2022) EPS of the Big Five beat our estimates by 9% on average, due to stronger than expected lending, and lower than expected loan loss provisions. Except CIBC, all of the Big Five reported earnings growth in FY2022.
  • Lending surged 17% in FY2022 vs 6% in FY2021. Due to higher rates, and a slowing economy, we are expecting loan growth to decline in FY2023. The IMF recently lowered their 2023 GDP growth forecast for Canada from 1.8% to 1.5%.
  • The allowance for losses as a percentage of outstanding loans remained unchanged QoQ at 0.60%. We expect allowances to reach 0.75% by the end of FY2023, but below their peak of 0.94% in FY2020, as the labor market is stronger than 2020 levels, and the unemployment rate is at historical lows.
  • On November 29, 2022, RBC announced plans to acquire HSBC Bank Canada (LSE: HSBA) for $13.5B, implying 2.4x P/B and 18.7x P/E. These multiples reflect a 103% premium to the current sector averages, and a 49% premium to pre-pandemic levels, indicating that RBC is expecting significant synergies from the deal.
  • The Bank of Canada raised its benchmark rate by 0.5% to 4.25%, but signalled a potential pause in rate hikes. We believe a pause should benefit the Big Five, as additional rate hikes could be detrimental for GDP growth, and drive defaults/foreclosure rates higher. A recent survey by IG Wealth Management indicated that more than 50% of Canadians are worried about being able to make mortgage payments if rates continue to rise.
  • We are introducing our FY2023 forecasts in this report. Our FY2023 EPS forecasts are 2% higher YoY on average, driven by higher rates, partially offset by higher provisions and slower loan growth. Our revised fair value estimates indicate an average expected total return (including dividends) of 26% for the Big Five. BNS and CIBC continue to have the highest expected yields. We believe BNS has the highest upside potential.
  • BNS and CIBC were in line with our estimates, while BMO and TD significantly outperformed.
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