The relative strength of Royal Bank’s (NYSE:RY) third quarter results should be repeatable in future quarters, according to Dundee Securities analyst John Aiken, who upgraded the stock to Neutral from Sell and boosted his price target from C$40 to C$54.
He told clients to expect the bank’s absolute and relative valuation multiples to increase coming out of the quarter, but continues to believe absolute valuations for the banks as a whole are too high. As a result, the analyst finds it difficult to rate any banks a Buy, although he is tempted to for some, like Royal, on a relative basis.
Mr. Aiken remains concerned about how rising unemployment in Canada and the United States will impact retail and corporate credit quality in the next year.
He does have one major complaint against Royal – the level of trading revenues, which came in at C$1.6-billion for the quarter, or roughly 21% of all revenue.
“We continue to believe that Royal’s earnings quality is dampened by the significant level of revenues generated by its trading activities,” the analyst wrote. “However, RY’s trading revenues continue to be frustratingly less volatile than its peers, despite their absolute size.”
Mr. Aiken thinks the market will look beyond this and focus on the bank’s comment regarding the “decline in the pace of credit deterioration” in its U.S. portfolios.
While corporate loan quality improved marginally in the quarter, he noted that retail credit continues to deteriorate and will continue to be impacted by unemployment levels. However, the analyst pointed out that Royal’s balance sheet strength provides a significant cushion.