Royal Bank of Canada (RBC) showed results in the third quarter that exceeded analysts’ expectations and forecasts, but the problems that the financial institution will face in the near future became a reason for one of the experts to downgrade the lender’s shares.
Veritas analyst Nigel D’Souza downgraded RBC to a reduce. He also reduced his estimate of the target price of the stock for 12 months to $122 from $144.
In a Friday note to clients, he said that the downward revision of the rating position of a financial institution within the forecast of net interest income growth is due to unfavorable trends in deposits, which are a factor of pressure on the cost of funding. Separately, he noted that higher non-interest expenses are a circumstance adversely affecting the operating lever.
The analyst also said that the inflow of deposits to the financial institution continues, but the pace of this process has slowed down. He expressed concern that the influence factor in the form of inflationary pressure may cause a further decline in these dynamics in the foreseeable future.
The analyst expects that next year the financial institution will assume the costs of restructuring. The bank is convinced that this is possible if some employees are dismissed.
Amid the decline in the rating position, Nigel D’Souza continues to positively assess the fundamental indicators of the financial institution. He also expects that in the long term, the results of the lender’s activities will exceed the level of efficiency of its competitors.
The analyst noted that currently, the priority is to reduce costs and stabilize the cost of financing, after which it will be reasonable to form a more optimistic forecast of RBC’s activities. This is the case when some difficulties in the present do not cancel out favorable prospects for the future.
As we have reported earlier, S&P Global Ratings Downgrades Five Regional US Banks.
