Q4 Preview

Canadian lending slowdown? Not yet. Data from both the Bank of Canada and OSFI suggests that quarterly domestic loan growth could be in the 2% QoQ range, which outpaced our previous expectations. Growth was evident across most categories, including strong commercial lending trends and (still) robust residential mortgage growth. We believe the latter represents a lagged reaction to mortgage regulations implemented earlier in the year. We note that NA, TD and RY exhibited the most growth.

Looking for weaker loan growth out of non-Canadian operations. U.S. regulatory filings point to a slowdown, particularly in C&I lending. We believe this trend is negative for BMO, and we've pushed back our expectations for positive U.S. loan growth until early 2013. However, TD will likely experience a big drop-off from last quarter's 5% QoQ growth. As it relates to BNS, management commentary last quarter suggested a pullback. We also note that LatAm comps in Chile, Peru and Colombia also exhibited moderating volume growth.

Wholesale should be led by trading. Read-throughs from U.S. comps point to a relatively robust set of trading results, which should easily surpass what was a disastrous prior year. On average, we are forecasting 124% YoY trading revenue growth (negative 1% YoY).

Capital management as an incremental source of return has become more important. We expect dividend increases from NA, CWB and LB. As it relates to buybacks, CM, NA and RY have implemented NCIBs. As we indicated in a report entitled Buybacks: re-emerging capital management strategy in a slow growth environment, we believe BMO should follow suit in order to deploy excess capital (and defuse lingering M&A concerns).

Ahead of the quarter, we like RY and NA. On RY, our $1.31 estimate is ahead of consensus by 5%. We believe the stock should benefit from: (1) a stronger capital markets backdrop; (2) superior domestic retail results owing to relative margin stability and positive operating leverage; and (3) a full quarter of consolidated Dexia results (only 4 days last quarter). Though we are NEUTRAL on NA, results should benefit from strong trading revenues, robust domestic loan growth and (potentially) tighter expense controls.

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1H13 Preview: Minimal event risk (Reports 22 Nov)

FPH report 1H13 results on 22 Nov. Our key estimates are shown above and on page 3. Naturally, we are very close to FPH's recent guidance.

Themes: Re-focus on operations With the stabilisation (albeit at elevated levels) of NZD/USD, we expect a (partial) re-focus on operations/CCY performance, less of the usual FX focus.

We are modestly ahead of guidance (see below) given positive updates at both the ASM (Aug-12) and investor day (Sep-12).

Competitive bidding (see pg 4): reasonable risk, announcement "imminent".

Gains in market share vs RMD (see pg 4): RMD recently stated slowing in mask growth due to new mask releases (likely FPH's Pilairo/Eson masks).

Share price implications: Expect minimal event vol.

Overall, we expect a Neutral to slightly favourable update. We see a low risk of surprise either way on the day, given that FPH gave explicit guidance towards the end of the half. FPH gave guidance at their ASM (23 August) for 1H13 of cNZ$265mn operating revenue and cNZ$31mn NPAT.

Given FX has since stabilised, and there has been no obvious competitive disruption / FPH developments, we expect this guidance to largely hold true.

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Capital position and dividend policy supports solid internal capital generation. The capital position remains strong, with CAR at 29.4% (tier 1: 20.7%). DPS was up 5% to 195c (the dividend cover was 1.8x versus Cse: 2x). The guidance for 2013 is a dividend cover of 1.7x-2.0x. The final dividend of 110c has been offered with scrip alternative.

Medium-term targets have been refined but remain very attractive. The group has lowered its medium-term targets for ROE (2016) to 25%-30% (from 30%), asset growth remains >15% CAGR. Targets for 2013 are ROE>21%, Advances growth >23%.

Operational performance reflects improving momentum in our view. EPS up 18% to 343c (CSe: 355c). DPS up 5% to 195c (CSe: 178c) - Dividend cover 1.8x vs. CSe 2x. ROE 20% (CSe: 20.9%). Gross advances growth 33% to R53bn (CSe: 27%), with disbursements up 22%. Yields declined from 35.45 to 34.1% but slower than our expectations (CSe: 33.5%). Cost growth trends improving in H2 (H1 cost growth up 31%; H2 up 16%) Asset quality. Credit loss ratio was 10.8% (CS: 10.1%). There has been a refinement to the write-off policy through scorecards, resulting in a write-off in Aug-12 of R1.9bn. The provision coverage (post write-off) was 58% and was raised to 60% in line with historical levels. The refinement of the write-off policy will result in higher provisions in our view and further analysis is required.

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Canada: The next year remains an important one for the Canadian division, with the potential for new credit card regulations, the upcoming mile expiry and the CIBC contract renewal. Based on our earlier Canadian focused research, including "Back from the Future..." and "The Risk of 'Surcharge' is No Reason to 'Discount' Aimia" we believe these events are important to watch, but that the ultimate impact will be modest. Additionally, we believe continued cost synergies in Canada can help offset slower Aeroplan growth. As investors re-gain confidence in the Aeroplan program, which still represents almost 70% of value, we see the potential for multiple accretion.

International Upside: In the meantime, we believe momentum from existing international assets will continue to support near-term earnings growth, driving a 2-year consolidated adj. EBITDA CAGR of +8% y/y. Investors also have optionality from equity investments that we mostly value at invested capital. Near-term catalysts that may surface further value include the launch of a U.S. coalition program, continued momentum at Club Premier, traction in Brazil and greater visibility on the promising Cardlytics investment.

Valuation: Our DCF based target price has an implied value of 8.2x EV/adjusted EBITDA. Aimia is currently trading at a 7.1x EV/adjusted EBITDA multiple and a 10% FCF yield.

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Bottom line: Solid set of numbers in our view (although need to look closer at impairments), with ROE 20% (36% RoTE). The guidance (see below) of solid yet cautious asset growth, stable yields and containment of cost growth is encouraging. The challenges include increased competition, a subdued economy and risk emergence in pockets of the market. The lower dividend cover of 1.8x was a little surprising in our view but the scrip alternative for the final dividend will help keep capital position healthy.

Capital position and dividend policy supports solid internal capital generation. The capital position remains strong, with CAR at 29.4% (tier 1: 20.7%). DPS was up 5% to 195c (the dividend cover was 1.8x versus Cse: 2x). The guidance for 2013 is a dividend cover of 1.7x-2.0x. The final dividend of 110c has been offered with scrip alternative.

Medium-term targets have been refined but remain very attractive. The group has lowered its medium-term targets for ROE (2016) to 25%-30% (from 30%), asset growth remains >15% CAGR. Targets for 2013 are ROE>21%, Advances growth >23%.

Operational performance reflects improving momentum in our view. EPS up 18% to 343c (CSe: 355c). DPS up 5% to 195c (CSe: 178c) - Dividend cover 1.8x vs. CSe 2x. ROE 20% (CSe: 20.9%). Gross advances growth 33% to R53bn (CSe: 27%), with disbursements up 22%. Yields declined from 35.45 to 34.1% but slower than our expectations (CSe: 33.5%). Cost growth trends improving in H2 (H1 cost growth up 31%; H2 up 16%) Asset quality. Credit loss ratio was 10.8% (CS: 10.1%). There has been a refinement to the write-off policy through scorecards, resulting in a write-off in Aug-12 of R1.9bn. The provision coverage (post write-off) was 58% and was raised to 60% in line with historical levels. The refinement of the write-off policy will result in higher provisions in our view and further analysis is required.

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