Citigroup Downgrades Royal Bank and Scotiabank

Downgrades for two of the Big Six banks could weigh on Canadian financial stocks this week.

Citigroup cut Royal Bank of Canada (RY) to “sell” from “hold” based on what the firm considers a conservative estimate for a potential credit-related write-down of C$5-billion and a C$2-billion increase to the provision for credit losses.

Analyst Shannon Cowherd told clients:

Our estimates are based on our assessment of the bank’s exposures and the actions employed by similar U.S. banks during Q108 results reporting.

She also cut her price target from C$47 to C$40 per share.

Meanwhile, Bank of Nova Scotia (BNS) was cut to “underperform” from “sector perform” at RBC Capital Markets. Analyst Andre-Philippe Hardy said Scotiabank is more susceptible to a re-rating down than Toronto-Dominion Bank (TD) and Royal, the other two most expensive Canadian banks on a price-to-earnings basis.

He told clients that:

The bank has done a good job of largely avoiding exposures to structured finance, and we believe the bank has above-average medium- and long-term growth prospects compared to its peers due to its presence in Latin America and the Caribbean. However, the bank is not as well positioned for credit deterioration in its North American and emerging markets loan books.

Mr. Hardy also cut his price target on Scotiabank to C$46 per share from C$48.

Despite the rally in bank stocks since mid-March, he continues to think investors should be patient and will have a better opportunity to buy during the next 12 months.