TD Bank’s better-than-expected quarter points to possible earnings upside for other banks: Analyst #CanadaFinance

Toronto-Dominion Bank’s (TD.TO)(TD) better than expected second-quarter earnings, which have prompted a number of analysts to hike their price targets, could point to “better than forecast” earnings for the other major Canadian banks, one analyst says.

TD’s adjusted second-quarter earnings of CAD$1.97 per share, announced Thursday, beat consensus estimates of $1.76. In a note to investors, Jefferies Financial Group analyst John Aiken wrote that the earnings beat was powered by TD’s provisions for credit losses (PCLs) — money set aside to cover bad loans — which came in below expectations.

“While there are likely some idiosyncratic issues to TD’s earnings (notably its U.S. retail bank), we believe that the laterals to the other Canadian banks’ earnings are positive,” Aiken wrote. If other banks have similar PCL results, Aiken added, it could lead to “better than forecast earnings for the group.”

Canada’s other major banks report quarterly earnings next week, beginning with Bank of Nova Scotia on May 27.

Aiken raised his price target for TD shares on the Toronto Stock Exchange from $90 to $103, with a chorus of investment banks making similar adjustments based on improved earnings estimates.

TD shares closed at $92.41 on the TSX Thursday, up $2.91, or 3.24 per cent, on the day, and were up around 0.5 per cent as of 10:30 a.m. Friday.

Aiken wrote that within TD’s Canadian personal and commercial banking business, “the modest but still positive loan growth” should probably be mirrored among the other Canadian banks, “while margins could garner varied performances.”

Jefferies expects particular strength at Royal Bank of Canada (RY.TO)(RY) and National Bank of Canada (NA.TO) due to their respective recent acquisitions of HSBC and Canadian Western Bank (CWB). The CWB deal might also give “a modest bump” to National Bank’s wealth management performance, Aiken says, while RBC is likely to outperform the other banks on that measure.

“Robust margins” in TD’s U.S. banking division might be unique, Aiken writes, but Jefferies nonetheless projects that “the stable loan performance could bode well for the Canadian banks with U.S. retail and commercial banking operations, including CIBC’s U.S. Commercial Banking and Wealth Management and Royal’s City National platforms.”

Jefferies also forecasts dividend increases at RBC (projected to rise 2.7 per cent), National Bank (projected up 2.6 per cent) and BMO (projected up 2.6 per cent).

John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.

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