BofA Upgrades Bank of Montreal, Downgrades Royal Bank of Canada

Canadian banks reported upbeat earnings for their fiscal first quarter, while the stricter lockdowns in recent months did not alter their credit outlooks, according to BofA Securities.

The Canadian Banks Analyst: Brandon Nispel upgraded the rating for Bank of Montreal BMO from Neutral to Buy, while raising the price target from $120 to $125. The analyst also downgraded the rating for Royal Bank of Canada RY from Buy to Neutral, while keeping the price target unchanged at $125.

The Canadian Banks Thesis: Canadian banks are “heading into a period of increasing capital return (mid-2021), strengthening customer activity and rising interest rates that should alleviate the pressure on margins while boosting stock valuations,” Nispel said in the note.

Referring to Bank of Montreal, the analyst wrote, “We believe that CEO Darryl White’s focus on delivering positive operating leverage while optimizing the ROE profile of the franchise should lead to above average growth. In the U.S. BMO is in a sweet spot to take advantage of the scale benefits that come from having a nearly $1 (CAD) trillion balance sheet, while being small enough where it should continue to see market share opportunities.”

He added that Royal Bank of Canada’s stock had underperformed significantly during the post-vaccine rally and there were “no clear catalysts in recent months” to drive upside.

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