Canadian Banks are witnessing an improving macroeconomic backdrop, according to BofA Securities.
The Canadian Banks Analyst: Ebrahim Poonawala upgraded Bank of Montreal (NYSE: BMO) from Underperform to Neutral with an unchanged price target of CA$88 ($66.18).
In a separate note, Poonawala upgraded Bank of Nova Scotia (NYSE: BNS) from Neutral to Buy and raised the price target from CA$63 to CA$68.
The Canadian Banks Thesis: The pressure on Bank of Montreal’s stock year-to-date and management’s efforts to build credit reserves and provide increased visibility into its commercial lending business have helped to make the risk-reward more balanced, Poonawala said in a Tuesday upgrade note.
Given expectations of further improvements in the macroeconomic environment, there is “a lower probability that the stock meaningfully underperforms,” the analyst said.
“Assuming no major hiccups on credit, we believe mgmt’s laser focus on expense mgmt combined with the ability to capitalize on a sustained economic recovery should be viewed positively as investor focus shifts towards pre-provision net revenue (PPNR) resiliency.”
PPNR resiliency should also benefit Bank of Nova Scotia, Poonawala said.
The risks faced by the company in Latin America are already priced in, while “Scotia seems well positioned to capitalize on a recovery, with GDP growth in this region expected to rebound to 4% YoY in 2021 from -8% in 2020.”
Bank of Nova Scotia’s investors earn a 6.5% dividend yield, the highest among the big five banks, while waiting for earnings to recover, according to BofA.
BMO, BNS Price Action: Shares of Bank of Montreal were 2.18% higher at $60.41 at the close Tuesday, while Bank of Nova Scotia shares ended the session slightly lower at $42.
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