Noah Zivitz

Managing Editor, BNN Bloomberg

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Royal Bank of Canada is the victim of its own success, as a Bay Street analyst downgraded the company's shares on Monday while pointing to the potential for higher returns among the other Big Six banks.

In a note to clients, Canaccord Genuity Analyst Scott Chan raised his price targets for each of the country's largest banks. He said "tailwinds" are emerging as central banks prepare to start lifting their main policy rates, which will boost the banks' net interest margins, or the difference between what they charge for loans and what they pay in interest on deposits.

He estimated loan growth for the Big Six will rise six per cent this fiscal year, double the growth that was posted in fiscal 2021. 

Chan raised his price targets for the Big Six by an average of four per cent. The most substantial hike went to Canadian Imperial Bank of Commerce, with Chan raising his target seven per cent to $172.00 from $161.00. Bank of Nova Scotia saw the most modest bump, with Chan raising his target two per cent to $98.00 from $96.00.

Once dividends are taken into consideration, Chan sees an average total return of 8.9 per cent for the group. Royal Bank's lags, with an estimated total return of 4.3 per cent. It's on that basis that Chan cut the bank's shares to a hold from a buy.

Through the close of trading on Friday, Royal Bank's total return over the last three months was 11.8 per cent, compared to an 8.4 cent return for the S&P/TSX Composite financials sector.

"Going forward, we favour the banks (BMO, Bank of Nova Scotia, CIBC, TD) with larger personal and commercial exposure/rate sensitivity (largely lagged most other segments during the pandemic) and generally less constructive on banks (Royal, National) with more market sensitive segments (e.g. capital markets, asset management, wealth management)," Chan wrote in his report.