U.S. banks reported strong earnings for the second quarter and analysts at Scotia Capital Markets think that’s a good news for their Canadian counterparts, which release third quarter earnings at the end of August. “We believe the U.S. banks’ results should give investors a bit more confidence in the near-term earnings outlook for the large Canadian banks, particularly in light of current elevated valuation multiples,” Mike Rizvanovic, a Scotia Capital analyst, said in a note on July 22. Rizvanovic looked at four big U.S. money centre banks and eight large regional banks and found that they beat earnings per share (EPS) consensus on average by nine per cent. Meanwhile banking fees jumped 16 per cent from the first quarter at U.S. giants Goldman Sachs Inc. and Morgan Stanley. Trading revenue driven by equities surged to record levels at JPMorgan Chase and Co., Bank of America Co., Morgan Stanley and Goldman Sachs. Total loans grew, with commercial posting stronger performance than personal. Toronto-Dominion Bank (TD:TSX) and Bank of Montreal (BMO:TSX) are best placed to benefit from rising U.S. personal and commercial lending, Rizvanovic said, with BMO positioned to gain the most given it has a larger commercial lending presence in the U.S. at 78 per cent of personal and commercial banking, versus 48 per cent at TD. Scotia Capital has 12-month price targets of $239 and $169 for BMO and TD. Shares closed Friday at $250.77 and $169, respectively. CIBC Capital Markets analyst Paul Holden said U.S. capital markets results bode well for BMO, Royal Bank of Canada (RY:TSX) and National Bank of Canada (NA:TSX) due to their exposure to U.S. investment banking franchises and equity trading desks. National Bank could also benefit. However, Holden warned investors capital markets could switch from a “tailwind” to a “headwind if market conditions shift.”
