CIBC says rate cut means it’s time to buy discount bank stocks – BNN Bloomberg

(Bloomberg) — Analysts at Canadian Imperial Bank of Commerce said it’s time for stock investors to move out of premium-traded Canadian banks and into discount banks, citing lower interest rates and reduced economic risk that translate into greater earnings growth potential for cheaper stocks.

CIBC said it had raised Bank of Nova Scotia’s rating to outperformer and downgraded National Bank of Canada to neutral as borrowing costs fall and declining economic risk means banks don’t have to put as much money aside for bad loans. That gives Scotiabank an opportunity to catch up with National Bank, and analyst Paul Holden said valuation spreads remain wide.

“We believe these conditions create the foundation for a shift from premium banks to discount banks,” Holden wrote in a note on Thursday.

Holden said the swap would be especially effective if expectations for loan-loss reserves — the amount banks set aside for potentially bad loans — start to decline, as discount banks typically have the highest ratios.

CIBC said it chose Scotiabank as the “right deal” because it could post the highest earnings growth rate over the next two fiscal years, given its unique exposure, which could see net interest margin improvement from interest rate cuts and a tailwind from declining loan loss reserves. CIBC analysts have updated their earnings estimates for Scotiabank for the next fiscal year to be 2% higher and 5% higher in fiscal 2026.

The team also noted that Toronto-Dominion Bank is trading at a 7% discount to the group, a difference they expect to narrow as U.S. anti-money laundering regulations are resolved by year-end.

“TD is reporting solid fundamentals, and we believe concerns about future earnings growth are overblown,” Holden wrote. “We also believe the CEO succession means a global AML settlement is imminent.”

National Bank outpaced all of its peers except CIBC, which surged in late August after saying problems with its U.S. office portfolio had eased. National Bank has gained nearly 26% since the beginning of the year, compared with 13% for the S&P/TSX Composite index banking subgroup.

Scotiabank shares rose 1.5% in early trading on Friday. National Bank fell the same amount.

What Bloomberg Intelligence Says

“Scotiabank is counting on a strategic shift from Pacific Alliance to North America to bring its profitability and risk measures closer to its peers. It is behind its medium-term ROE target of more than 14%, which is slightly below its peers. Its international exposure is keeping its credit reserve ratios above its rivals, while the bank is pursuing efficiency improvements in line with other large Canadian banks,” Paul Gulberg, senior industry analyst at BI