Jefferies Financial Group downgraded both Royal Bank of Canada and Toronto-Dominion Bank to \u201cHold\u201d from \u201cBuy,\u201d leaving no Canadian banks under their coverage with a \u201cBuy\u201d rating. (Andrew Francis Wallace\/Toronto Star via Getty Images) \u00b7 Andrew Francis Wallace via Getty Images <\/p>\n
Jefferies Financial Group downgraded two of Canada\u2019s largest banks on Tuesday to “Hold” from “Buy” in a bearish preview of the fourth-quarter earnings season that stands out against a generally more upbeat take from other analysts.<\/p>\n
\u201cAfter an exceptionally strong run in the fall, the Canadian banks are trading at levels that could charitably be described as fully valued,\u201d analyst John Aiken wrote in a note to investors. \u201cIn an outlook where top line growth will remain challenged, and credit pressures have yet to dissipate, we believe that the current downside risk is greater than their upside risk.\u201d<\/p>\n
Jefferies downgraded both Royal Bank of Canada (RY.TO<\/a>, RY<\/a>) and Toronto-Dominion Bank (TD.TO<\/a>, TD<\/a>) to \u201cHold\u201d from \u201cBuy,\u201d leaving no Canadian banks under their coverage with a \u201cBuy\u201d rating.<\/p>\n That position is largely based on valuations rather than structural concerns. Aiken declared his outlook for the fourth quarter as \u201csolid\u201d and noted that \u201cwe still believe in the investment theses\u201d of the downgraded banks. And Jefferies\u2019 preview is still accompanied by slight upward nudges of most price targets. (National Bank of Canada (NA.TO<\/a>) is the exception, with its target lowered from $153 to $152.)<\/p>\n Nonetheless, analysts elsewhere have largely shown more enthusiasm for the major banks, which have each seen their stock prices on the Toronto Stock Exchange rise by at least 20 per cent since the start of the year. \u201cThe positive fundamental outlook has not changed in our view,\u201d wrote CIBC analyst Paul Holden. Scotia analyst Mike Rizvanovic forecast \u201canother solid quarter \u2026 to end a very strong year.\u201d<\/p>\n Analysts\u2019 views diverge most significantly over credit risk, capital markets momentum, and how long current earnings strength can last.<\/p>\n Jefferies and National Bank Financial analysts expect credit costs to stay elevated, while Desjardins and CIBC expect provisions to level off or improve as loan quality stabilizes. On capital markets, Jefferies predicts a moderation from recent highs, whereas Scotiabank and RBC think activity will remain strong through year-end. National Bank Financial cautioned that growth in capital markets faces \u201can incredibly high bar.\u201d<\/p>\n Valuation differences persist as well. National Bank\u2019s assessment mirrors Jefferies\u2019 take that the banks are fully priced, while CIBC\u2019s Holden argues that solid capital positions could justify modest multiple expansion. Scotia\u2019s Rizvanovic suggested that although valuations are at a 13.2x multiple of fiscal 2026 earnings estimates, they sit at \u201ca more reasonable\u201d 11.9x on estimates for the 2027 fiscal year, \u201cwhich we believe leaves some upside potential post-quarter.\u201d<\/p>\n Concerns about valuations underpin Jefferies\u2019 downgrade of Royal Bank and TD, with Aiken writing that the banks\u2019 \u201cmultiples fully reflect their upside.\u201d Jefferies also lifted Canadian Imperial Bank of Commerce\u2019s (CM<\/a>, CM.TO<\/a>) target to $118 \u2014 an 11 per cent increase \u2014 for what it called steady execution. It trimmed its EQB Inc. (EQB.TO<\/a>) target to $93 from $107 because of \u201cprofitability headwinds.\u201d Although upside is in play, Aiken wrote, the heightened downside risk means \u201cany miss on earnings in the fourth quarter could have significant negative consequences for valuation multiples.\u201d<\/p>\n National Bank Financial upgraded Royal Bank to \u201cOutperform\u201d while downgrading Bank of Montreal (BMO.TO<\/a>, BMO<\/a>) to \u201cSector Perform.\u201d Analyst Gabriel Dechaine wrote that RBC remains \u201dthe sector\u2019s quality leader,\u201d citing its capital-markets strength and ability to maintain superior returns on equity. National Bank\u2019s targets rose by an average of 13.6 per cent, including a 23.5 per cent jump for Bank of Nova Scotia (BNS.TO<\/a>, BNS<\/a>) \u2014 though the new $100 target is consistent with other analysts.<\/p>\n Another focal point heading into results is National Bank\u2019s update on its acquisition of Canadian Western Bank. Multiple analysts said updates on expected revenue synergies and capital relief could prove to be a catalyst for the stock.<\/p>\n Analysts expect the banks to keep returning capital through buybacks and dividend increases, supported by the strong balance sheets and high capital levels they\u2019ve built up since the pandemic. Canada\u2019s major banks begin reporting results on December 2, when Scotia opens the season.<\/p>\n John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf<\/a>.<\/p>\n Download the Yahoo Finance app, available for Apple<\/a> and Android<\/a>.<\/p>\n