Monday, April 28, 2008

'sell Royal Bank' - citi

As the credit crunch rages on, the latest arrow comes from Citigroup, who have downgraded Royal Bank of Canada (RY) to a 'SELL'.

Citi analyst says, "In our view, as the largest of the Canadian banks, Royal likely has significant exposure to the deteriorating credit markets. Given the bank's size, C$632B in assets and diversified lines of business we think long term the bank will be able to withstand the current credit crunch. In the near term, we anticipate credit related write downs to adversely impact earnings and book value. We also expect increased provisions for loan losses as credit trends continue to deteriorate. "

No doubt Royal has exposure to melting credit markets, and given their size they do have their hands in a lot of cookie jars. It is important to note though that Royal derives a significant portion of the revenue from Canadian retail banking, as well as Canadian wealth management, which are in healthier current states and will buoy them. One of the large Canadian banks, in fact the largest and arguably the best positioned and strongest, being rated as a 'Sell' is likely a rare call in Canada or the U.S. for that matter. If Citi's call comes to fruition this could be a great opportunity for long term dividend growth investors. Citi changed their target price for shares of RY from $47 to $40.

Royal trading at $40/share (citi's target price) means:
P/E = under 10x trailing EPS
Dividend Yield = pushing 5%

It is reassuring for Citi to point out that Royal should survive the credit crisis long term and thus should not go bankrupt due to it. I'm glad they pointed this out, as I would have assumed the bank would fail. (sense the sarcasm here)


Dividends4Life said...

If RY pulls back, I would take that as a buying opportunity. It is a solid well-managed company. I love bargains!

Best Wishes,

Four Pillars said...

That's funny - Citi can barely keep their own bank afloat.

I don't think their advice is worthy of lining a bird cage.

Sarlock said...

If RY does drop to $40 (or even $42), I'll definitely be going shopping to add some more to my reserves.

Some more write-downs are certainly coming, but I don't think they will be significant enough to impact the share price that significantly. Time will tell, of course, but I think the share price is already reflecting it.

Anonymous said...

Interesting if they have a sell on RBC, I would have to assume they have it on all the others (except TD perhaps).

If not, the only logic is that they expect RBC to post a big suprize writedown.

MG said...

I think citi is saying that RY will take a ~4.7B writedown. I don't believe this is reflected in the current stock price.

Thicken My Wallet said...

I give this report a big "so what?" Every bank is increasing its loan loss provisions so its no worse off than its peers. RBC has a very good retail operation- it knows how to attract money.

I would think RBC has the opposite issue- what failing U.S. bank will it try to pick up for a bargain?

MG said...

TORONTO, April 28 (Reuters) - Royal Bank of Canada (RY.TO: Quote, Profile, Research) said on Monday that a Citigroup (C.N: Quote, Profile, Research) research report on the bank's potential writedowns contains "significant errors in fact and significantly overstates both the risks and the amount of any potential writedown RBC might incur."

The rare statement from Canada's largest bank came after Citi research analyst Shannon Cowherd cut her recommendation on RBC stock to "sell" from "hold", and slashed her target price to C$40 a share from C$47.88. Cowherd cited the possibility of billions of dollars in credit-related writedowns as well as higher provisions for credit losses for her change in view.