Interest rate cuts mean time has come to buy discount bank stocks, says CIBC

financialpost.com:

Now is the time for equity investors to move out of premium-traded Canadian banks and into discounted banks, analysts at Canadian Imperial Bank of Commerce said, citing lower interest rates and easing of economic risks that give the cheaper stocks more earnings upside.

CIBC said it upgraded Bank of Nova Scotia to an outperformer rating and demoted National Bank of Canada to neutral as borrowing costs ease and fading economic risks mean banks don’t have to set as much money aside for bad loans. That gives Scotiabank an opportunity to catch up to National Bank, with analyst Paul Holden saying valuation spreads are still wide.

“We think these conditions set the stage for a trade out of the premium banks into the discounted banks,” Holden wrote in a Thursday note.

Holden said the switch trade would work particularly well if expectations for provisions for credit losses — the amount banks set aside for loans potentially going sour — start to come down since discounted banks tend to post the highest ratios.

CIBC said it chose Scotiabank as the “right trade,” because it could post the highest earnings growth rate over the next two fiscal years given its unique exposure that could see net interest margin improvements from rate cuts and a tailwind from declining loan loss provisions. The CIBC analysts updated their earnings estimates for Scotiabank in the next fiscal year to be two per cent higher, and five per cent higher in fiscal 2026.

The team also noted that Toronto-Dominion Bank is trading at a seven per cent discount to the group. They expect that gap to narrow once anti-money laundering (AML) issues in the United States are settled by the end of the year.

“TD has been posting solid fundamental results, and we think