01:19 PM EDT, 07/02/2024 (MT Newswires) -- UBS is initiating coverage of Canadian banks with a "cautiously optimistic" view

UBS has two Buys (Royal Bank, National Bank) and four Neutrals (TD, CIBC, Scotiabank, BMO). The Canadian banks have strong balance sheets, solid capital positioning and diversified business mix, which provides resilience amidst slowing revenue growth and rising credit costs, UBS writes. Amidst macro challenges and ahead of the mortgage renewal wave in Canada, the analyst has an appreciation for the Big Six banks' resilience of earnings through the cycle--the benefit of strong capital positions (average CET1 ratio of 13.1%, up ~170bps from pre-pandemic levels), bolstered allowances, strong underwriting and the fundamental strength in place.

Top picks Royal Bank of Canada ( RY ) and National Bank offer solid total return potential and greater resilience than peers given diversified business mix including greater fee income contribution and expense leverage in the face of normalizing credit quality.

For RBC, UBS favours size, scale and diversification positioning the bank to continue to deliver premium ROE of ~15%. The close of the HSBC Bank Canada transaction presents meaningful cost saves and revenue synergies over time which should only be complementary to the strength of the core franchise. For National, strong credit quality is foundational but strong top line growth (high single digits) combined with positive operating leverage all support the premium ROE of ~16%. National's acquisition of Canadian Western Bank, provides a path for further growth as well as providing for cost saves, potential for revenue synergies and overall earnings accretion, UBS said.

UBS is forecasting 2% EPS growth in F2024 and 7% EPS growth for the group in F2025.

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