Valuation Deep Dive on CAD Banks: Valuations Stretched Against Most Metrics

Research evidence excerpt

Valuation Deep Dive on CAD Banks: Valuations Stretched Against Most Metrics

ttractively on PEG Ratios, currently averaging 1.3x vs. a historical average of 1.5x. On a Source: FactSet; Jefferies.

PEG ratio basis, the banks (except RY) are trading at or near their respective bottom quartile going

back to 2005, which is entirely driven by higher expected EPS growth in a more normalized 2027.

Consensus estimates are forecasting 2Y EPS CAGR of 10%-15%, which is twice as high as the

historical average.

Although near-term growth is currently attractive, we believe these levels are unsustainable

in perpetuity, and valuation should eventually revert to historical mean. That said, even if EPS

growth materializes as expected, current valuation imply that share prices would need to fall over

the next 12 months to return to historical levels. Assuming Second NTM EPS consensus estimates

are unchanged and mean-reversion to historical NTM P/E, Banks share price would fall 20%-30%

over the next twelve months (except BNS). At historical valuation, market pricing are implying that

Second NTM EPS consensus are 30%-45% too low for all banks, except BNS which is 11% too high.

We do not believe aggressive share buybacks justify higher trading multiples. With meaningful

excess capital on their balance sheet, Canadian Banks have been aggressively buying back shares

to drive up ROE. Although we estimate this could drive up to ~6% of EPS accretion through 2027

on top of ~3% dividend yield, this would not be enough to drive P/E back to historical norms.

However, given current valuations, buybacks are becoming decreasingly accretive, and we would

expect activity to slow. If not, financial leverage would increase, giving less credence for historical

multiples.