The Royal Bank of Canada beat analyst expectations for its third quarter, but a string of challenges ahead has led one analyst to downgrade his rating on the stock.
Veritas Analyst Nigel D’Souza downgraded RBC to a reduce rating and lowered his valuation on the stock’s 12-month price target to $122 per share, down from $140.00 per share.
“We are downgrading RY (RBC) to reduce on a downward revision to our outlook for net interest income growth with unfavourable deposit trends continuing to pressure funding costs and higher non-interest expenses weighing on operating leverage,” he wrote in a Friday note to clients.
He explained that the bank’s deposit flows are continuing, though at a slower pace, and said he was concerned that inflationary pressures could lead to a further decline ahead.
D’Souza is also watching for RBC to take a restructuring charge in 2024 – something the bank has suggested is in the cards after promising job cuts to come.
Despite the downgrade, D'Souza still holds a favourable view of RBC's fundamentals and expects the bank to outperform its peers in the long run.
“We prefer to see a material reduction in expenses and a stabilization in funding costs before turning more bullish on RBC's near-term outlook,” he added.
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