09:00 AM EDT, 05/10/2024 (MT Newswires) -- Canadian banks are expected to report positive industry operating leverage for the first time in eight quarters in Q2, TD Securities said on Friday.

"The better operating leverage outlook mostly reflects normalizing expense growth supported by lower inflation and the restructuring efforts of 2023," analyst Mario Mendonca said in a note to clients.

The analyst said Canadian banks are expected to have Pre-Tax Pre-Provision (PTPP) earnings increase 6.9% year over year, which would reflect revenue growth of 5.6% (5.0% in Q1/24) and operating leverage of 0.9% (-2.5% in Q1/24).

"Revenue growth reflects a good balance of mid-single digit revenue growth across the three major revenue lines, including capital markets revenue which, with very few exceptions, has been weak for almost 3 years," Mendonca said.

"We frame the bank investment decision in the following way," the analyst said. "Valuation appears mildly attractive at best... "PTPP growth should accelerate in the near term (approaching high single digits)..."

"We are looking for an opportunity to become more constructive on this underperforming sector, but need a few conditions to be met: a) the credit cycle plays out or, at a minimum, PCLs ratios stop rising, b) the 5-year bond yield remains reasonably high supporting a better NIM outlook, and c) the deposit migration to higher cost deposits continues to abate, also supporting a better NIM outlook."