Here’s why TD upgraded Scotia and downgraded RBC

Bank of Quebec was upgraded and Royal Bank of Canada was hit having a downgrade, following a latest round of earnings in the Canadian banking sector.

Mario Mendonca at TD Securities raised his rating on Scotiabank to buy from hold after its first quarter earnings arrived slightly above expectations.

The analyst noted that the bank reported higher energy-related credit losses, but overall, there have been no surprises in this regard.

Mendonca’s upgrade is also based on estimates that suggest Scotiabank is trading at a seven percent discount to the banking peers.

“Historically, the bank’s stronger growth and premium valuation have been driven by consistent earnings and a strong international segment,” he said.

The analyst noted that Scotiabank has produce healthy gains in international loans and very strong fee income growth over the past two quarters.

He also anticipates the financial institution will produce near industry-leading domestic retail earnings growth.

Mendonca hiked his price target on the stock to $66 from $62.

Meanwhile, RBC was cut to hold from buy as it posted what Mendonca considers the “big surprise” in retail banking this quarter.

RBC saw earnings growth of just 0.9 per cent, and produced the weakest growth in the sector for that second straight quarter.

Trimming his price target on the stock to $78 from $80, Mendonca noted that he expected RBC would re-assert itself in domestic retail banking this year, particularly when it found loan growth and operating leverage.

“Appearing out of the quarter, we are concerned that RBC will continue to lag with respect to margins (rates remaining low impacting deposit margins) and fee growth,” the analyst said.

He added that the downgrade also reflects RBC’s higher below investment grade gas and oil exposure, and exposure to capital markets earnings, that are likely to be volatile in 2016.